Coase Theorem

The Coase theorem holds that, in the presence of externalities, an economic allocation can be efficient regardless of how property rights are initially assigned, provided that trade in the good or service causing the externality is possible and the parties can bargain freely. Its significance is the suggestion that private individuals could resolve externality problems themselves through negotiation, without government intervention, so long as the transaction costs of that bargaining are sufficiently low. The economist Ronald Coase, later a Nobel laureate, is credited with the underlying idea from his 1960 paper, in which he set out the ideal conditions under which such bargaining could reach an efficient outcome, while also arguing that real-world transaction costs are rarely low enough for this to actually happen; incomplete information and poorly defined property rights are common obstacles in practice. Coase's own conclusion was that the theorem is almost never directly applicable to real economic conditions, but that it remains a useful tool for predicting and analyzing possible outcomes, and it has become an important basis for modern economic analysis of government regulation, especially around externalities. The economist George Stigler was the first to call the idea a theorem, in a 1966 textbook. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/