Coase Theorem(s) ^*

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The Coase theorem(s) broadly assert:

1. That if (a) property rights are fully specified and enforced and (b) transaction costs (information costs, mobility costs, and other contracting costs) are zero, then voluntary exchange will invariably yield Pareto efficient solutions.

and,

2. That institutions exist solely to reduce transaction costs and facilitate efficiency.

Corollary: Transaction costs underpin any alleged efficiency failures of markets (e.g., problems associated with asymmetric information, public goods, externalities, or market power).

Corollary: Firms can survive only if they reduce transaction costs in transforming resources into goods and conveying goods from the ultimate owners of the resources to purchasers of final goods.

Corollary: If income effects are not present, Pareto efficient resource allocations are unaffected by patterns of resource ownership.

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^*The Coase theorems are named after Nobel Prize Winner Ronald Coase, whose reputation was established by two pathbreaking papers:

“The Nature of the Firm“, Economica, Vol. 4, No. 16, Nov 1937 pp. 386-405.

“The Theory of Social Cost,” Journal of Law and Economics, v. 3, No. 1, 1960, pp. 1-44.

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Author: Ralph Byrns

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