Coase Theorem

Examples of Coase Theorem in the following topics:

• The Coase Theorem

  • The Coase theorem states that private parties can find efficient solutions to externalities without government intervention.
  • The Coase Theorem, named after Nobel laureate Ronald Coase, states that in the presence of an externality, private parties will arrive at an efficient outcome without government intervention.
  • In practice, transaction costs are rarely low enough to allow for efficient bargaining and hence the theorem is almost always inapplicable to economic reality.
  • This graph exemplifies how Coase's Theorem functions in a practical manner, underlining the effects of an externality in an economic model.
  • According to the Coase theorem, two private parties will be able to bargain with each other and find an efficient solution to an externality problem.

• Types of Private Solutions

  • The Coase theorem, which was developed by Ronald Coase, posits that two parties will be able to bargain with each other to reach an agreement that efficiently addresses externalities.
  • However, the theorem notes several conditions in order for such a solution to occur, including low transaction costs (the costs the parties incur by negotiating and coming to agreement) and well-defined property rights.

• Organizations and Agents

  • Ronald Coase (1910-) sees both as mechanisms to reduce the costs of transferring ownership (Coase, 1937).
  • "I argued in 'The Nature of the Firm' that the existence of transaction cost leads to the emergence of firm" (Coase 1995, p 8-9).

• Introducing the Firm

  • According to Ronald Coase, people begin to organize their production in firms when the transaction cost of coordinating production through the market exchange is greater than within the firm.
  • For Coase the main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism.

• References

  • Coase, Ronald, "The Nature of the Firm," Economica, November 1937, Reprinted in The Firm, The Market and the Law, University of Chicago Press, 1988.
  • Coase, Ronald, "The Institutional Structure of Production," 1991 Alfred Nobel Memorial Prize Lecture in Economic Sciences, Stockholm, 1991, Essays on Economics and Economists, University of Chicago Press, 1995.
  • Coase, Ronald, "The Problem of Social Cost," The Journal of Law and Economics, 3, October 1960, Reprinted in The Firm, The Market and the Law, University of Chicago Press, 1988

• Institutions and Costs

  • The costs of using exchange are referred to as "transaction costs" (see Coase, "Nature of the Firm," 1937).

• Imperfect Competition and Monopolistic Competition

  • This is sometimes called the "excess capacity theorem;" firms build plants that are too small and operate them at less than full capacity.