Welcome to the Investors Trading Academy talking
glossary of financial terms and events.
Our word of the day is “Coase Theorem”
Coase theorem is the proposition that if private
parties can bargain without cost over the
allocation of resources, they can solve the
problem of externalities on their own.
It is a legal and economic theory that affirms
that where there are complete competitive
markets with no transactions costs, an efficient
set of inputs and outputs to and from production-optimal
distribution will be selected, regardless
of how property rights are divided.
The Coase Theorem, developed by economist
Ronald Coase, states that, when conflicting
property rights occur, bargaining between
the parties involved will lead to an efficient
outcome regardless of which party is ultimately
awarded the property rights, as long as the
transaction costs associated with bargaining
are negligible.
Specifically, the Coase Theorem states that
"if trade in an externality is possible and
there are no transaction costs, bargaining
will lead to an efficient outcome regardless
of the initial allocation of property rights.”
