Coase Theorem Moin Sheriff ECON360 Coase Theorem Ronald Coase received the Alfred Nobel Memorial Prize in Economic Sciences for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy (About Ronald Coase). Coase theorem is the scheme that in the absence of transaction costs, the level of production of goods and services in an industry in which there are externalities is independent of whether or not the party who commits negative externalities is legally liable for the coast of the externalities on other parties (Illustration of Coase Theorem). The Coase theorem states that ?When the parties affected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility for damages?. Coase later argues that zero transaction costs are a suitable proxy for perfect competition and notes that zero transaction costs were assumed in his original (1960) paper. Because Ronald Coase himself did not originally intend to set forth any one particular theorem, it has largely been the effort of others who have developed the loose formulation of the Coase theorem. What Coase initially provided was fuel in the form of ?counterintuitive insight?[Andrew Halpin, Disproving the Coase Theorem, 23 Econ. & Phil. 321, 325?27 (2007).] that externalities necessarily involved more than a single party engaged in conflicting activities and must be treated as a reciprocal problem. Notes: "About Ronald Coase". The Ronald Coase Institute. 03/15/2009 . "Illustration of Coase Theorem". San Jose State University. 03/15/2009 . Andrew Halpin, Disproving the Coase Theorem, 23 Econ. & Phil. 321 (2007).
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