Microeconomics

About Coase Theorem

For nearly 60 years of attempts to formulate the Coase theorem (Coase Theorem).

After the publication of the work of Coase (Coase, R. 1960. The problem of social

cost. Journal of Law and Economics 3(1), October. 1-44.), which has never given the

definition of the theorem, also has a lot of interpretations. But the problem is that any

attempt to formulate the Coase theorem makes it either a false statement or tautology

(Coase Theorem. Robert D. Cooter. The World of Economics. Edited by J. Eatwell,

M. Milgate, P. Newman.).

First, let us dwell on the basic interpretations of the theorem. Microeconomics argues

that in a free market, resources move to where their use is most effective. Developing

this idea, Coase concluded on the distribution rules of movement of resources and

rights. After all, besides the right of ownership of the resources, there are rights to

own land and property, the right to protection and education, to various

compensations, the right to compliance with contract etc. There are three main

interpretations of the Coase theorem that always excites interest and admiration. Let

me formulate them.

1. From the point of view of efficiency it does not matter, how rights were originally

distributed, if you can freely share them. In a free market the allocation of rights

becomes optimal.

2. From the point of view of efficiency it does not matter, how rights were originally

distributed, if transaction costs of exchange are zero. By transaction costs meant the

effort and time spent on execution of market transactions. Costs can be very large, for

example, if the deal is made between a lot of players located far from each other.

Transaction costs reduce market efficiency.

3. From the point of view of efficiency it does not matter, how rights were originally

distributed, in case if, the exchange occurs in the conditions of a perfectly competitive

market. So, to ensure the effectiveness of rights, it is necessary to stimulate

competition, to achieve the existence of a greater number of buyers and sellers.

As an illustration of the theorem, Coase brings out an example of the movement of

rights of market players. Next to the farmers there lays a railway with locomotives,

from the pipes of which sparks fly. Periodically, the are fires in the fields that destroy

crops. Each of the parties can solve the problem, but it is associated with certain costs:

farmers can reduce crops near the railway, and the railway company can use spark

arresters or reduce the number of trains. Farmers have rights to compensation by

filing lawsuits against the company, and the company has the right to operate the

railway. According to the Coase theorem, no matter how the law interprets this case,

the market will determine rights movement in the direction of greater efficiency. If the

costs of the railway company in case of the ban of train moving will be less than the

cost of farmers, the company can pay the farmers a sum of money in exchange for a

commitment not to impose a ban on the movement of trains. Conversely, the company

may sell the right to farmers and to reduce or prevent movement at the site.

Regardless of the initial allocation of rights, the farmers and the railroad will carry out

the bargaining until a possible win. The benefits of exchange are exhausted, when the

rights are distributed efficiently.