Coase Theorem
The Coase theorem says that if property rights are clear and bargaining is costless, parties will bargain to an efficient outcome regardless of who holds the initial right — the assignment affects distribution, not efficiency.
Definition
Coase (1960): with zero transaction costs, externalities are internalized by trade. In the real world transaction costs are the whole story — so institutions, courts, and market design matter. The theorem is a benchmark that explains why we need those institutions.
Why it matters
OTC netting, ISDA, and bankruptcy safe harbors are Coasean plumbing: they cut the cost of reallocating default risk. When they fail, you get Lehman-weekend chaos.
Case
A factory and a fishery can bargain over pollution if rights are defined. A failing dealer and a hundred counterparties cannot bargain in an afternoon — that is why resolution law exists.
How to read it
If someone quotes Coase to say ‘markets will fix it,’ ask what the transaction costs are. High costs void the efficiency claim.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- The Problem of Social CostCoase · 1960 · Journal of Law and EconomicsThe Coase theorem paper.