Coase Theorem

Abstract

The Coase Theorem states that if transaction costs are zero, the efficient allocation of resources will occur, regardless of the initial distribution of entitlements, so long as the entitlements are well defined. Many scholars have cited the Coase Theorem for various claims—that government regulation is of limited importance, that Pigouvian taxes are ill-advised, and that government should focus on ensuring that property rights are well defined. Ronald Coase did not formulate the Coase Theorem. George Stigler (1966) did. While there is much of value in Coase’s (1960) work, which helped stimulate interest in the optimal design of legal and market institutions, the Coase Theorem should be forgotten.