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The Coase Theorem has been used by jurists and legal scholars in the analysis and resolution of disputes involving both contract law and tort law. In contract law, the Coase theorem is often used as a method to evaluate the relative power of the parties during the negotiation and acceptance of a traditional or classical bargained-for contract.
Here, Coase is referencing Pareto efficiency allowed by the prevailing “pricing system”. Coase used the example of pollution (raised by George Stigler in The Theory of Price, 1952) several times: he argued that arbitrage between actors in a market with low transaction costs could lead to an efficient market solution. [6]
The Coase conjecture, developed first by Ronald Coase, is an argument in monopoly theory.The conjecture sets up a situation in which a monopolist sells a durable good to a market where resale is impossible and faces consumers who have different valuations.
This is known as Coase theorem. Critics of this view argue that this assumes that it is possible to internalize all environmental benefits, that owners will have perfect information, that scale economies are manageable, transaction costs are bearable, and that legal frameworks operate efficiently.
This leads to the wide acceptance of the Coase theorem assertion that, subject to income effects, the allocation of resources will be independent of the assignment of property rights when costless trades are possible. [5] This is to say, the allocation of property rights does not influence the way externalities are internalized by the market.
The Coase theorem is one extreme version of this logic. If property rights are well defined and if there are no transaction costs, then market participants can negotiate to a solution that internalizes the externality. Moreover, this solution will not depend on who is allocated the property right.
It has its roots in two articles by Ronald Coase, "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960). In the latter, the Coase theorem (as it was subsequently termed) maintains that without transaction costs, alternative property right assignments can equivalently internalize conflicts and externalities.
Thus, while Coase himself appears to have considered the "Coase theorem" and Coasian solutions as simplified constructs to ultimately consider the real 20th-century world of governments, laws, and corporations, these concepts have become attached to a world where transaction costs were much lower and government intervention would unquestionably ...