What is the Coase theorem? Why is it not that practical?

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Coase theorem is a economic and legal theory that states that in an ideally competitive market with no transaction costs, an efficient set of inputs and outputs to and from production-optimal distribution are selected, regardless of how property rights are divided. Further, this Theorem asserts that when property rights are involved, parties naturally gravitate towards the most efficient and mutually beneficial outcome. In scenarios where conflict of property rights exist, the involved parties can bargain or negotiate terms that are beneficial to both parties than the outcome of any assigned property rights. It also asserts that in order for this to occur, bargaining must be cost free. If there are costs associated with bargaining (example costs related to meetings or enforcement), it does affects the outcome.

Coase theorem is not that practical because in the real world, it is almost impossible for the transaction costs to be zero. The second issue is the irrationality amongst various parties involved due to endowment effect (behavioral and psychological hypothesis which states that people more value to things just because they own them). The third issue arises dues to assignment problem of the intangible values / costs associated with the property.

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jeff jeffy answered 1 year ago

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