Coase theorem: a standalone construct

Ronald H. Coase set out the core argument in his 1960 paper The Problem of Social Cost (The Journal of Law and Economics), and George Stigler attached the name "Coase theorem" to it in the 1966 edition of his textbook The Theory of Price. The claim is that when property rights are clearly assigned and the cost of bargaining is zero, private parties will negotiate their way to the same efficient allocation of resources no matter who holds the right at the start, so the initial legal assignment affects who ends up wealthier but not what is produced or how a harm such as pollution is finally resolved. Coase built the point from cases of conflicting land uses, for example a rancher whose cattle stray onto a neighbouring farmer's crops, to show that in a frictionless world the parties themselves settle the external cost through trade rather than needing a tax or a court to dictate the result. The proposition Coase himself stressed is the corollary: because real bargaining is never costless, transaction costs and the exact design of legal rights do change economic outcomes, which reframed how economists study externalities, liability rules, and regulation. It stands as a theoretical benchmark rather than a description of everyday markets, and the work behind it earned Coase the 1991 Nobel Memorial Prize in Economic Sciences.[1][2][3]

Unit

A theoretical proposition in law and economics linking property rights, bargaining, transaction costs, and efficient allocation

Recovery means

Not applicable

Measured by

Not directly measured; examined by checking whether its assumptions of clear property rights and near-zero transaction costs hold, and tested empirically by studying whether parties bargain to efficient outcomes when those costs are low