Knowra Coase theorem Coase theorem The Coase theorem states that, with zero transaction costs and well-defined property rights, bargaining can produce an efficient allocation regardless of who initially holds the rights, though distribution may differ.
Transaction costs : Costs of arranging, negotiating, and enforcing exchanges beyond the price paid for the goods or rights exchanged. The theorem’s zero-cost assumption removes obstacles that can prevent bargaining from reaching an efficient allocation.
External cost : A cost imposed on people outside an activity’s direct exchange or production decision. Pollution damages are a standard kind of harm that parties may bargain to reduce.
Ronald Coase : A British economist whose work on transaction costs, firms, and property rights reshaped institutional economics. His 1960 article established the argument later known as the Coase theorem.
Law and economics : The study of legal rules using economic concepts such as incentives, costs, and resource allocation. Coase’s analysis helped make economic reasoning about legal entitlements central to this field.
Holdout problem : A bargaining failure in which a party with essential rights demands an excessive share of the gains from agreement. Strategic refusal can block efficient bargains even when the parties are few and rights are clear.
Property rights : Legally or socially recognized entitlements to use, control, transfer, or exclude others from resources. Clearly assigned rights give parties a starting point for bargaining over conflicting uses.
Initial endowment : The resources or entitlements assigned to a person before exchange or bargaining begins. The theorem permits different initial assignments while predicting the same efficient allocation.
The Problem of Social Cost : Ronald Coase’s 1960 article examining external effects, legal rights, and the costs of market transactions. Coase developed the argument through examples of conflicts such as smoke damage and cattle trespass.
Tradable emissions permits : Regulatory authorizations to emit pollutants that can be bought and sold among polluters. Permit trading applies bargaining logic to pollution while operating within a defined legal framework.
Free-rider problem : A collective-action problem in which people benefit from a shared good without contributing to its provision. Many affected parties can make bargaining costly and difficult to organize.
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