Coase theorem

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Coase theorem

economics

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July 16, 2026

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The Coase theorem, developed by Ronald Coase, addresses how to resolve market inefficiencies caused by externalities. An externality is a cost imposed on a third party due to an economic transaction between two other parties, such as pollution from a factory affecting nearby residents.1

The theorem posits that if transaction costs are low and property rights are clearly defined, private parties can negotiate a mutually beneficial solution to externalities without government intervention. For example, those affected by pollution could pay the polluter to reduce emissions, or the polluter could compensate those affected for the harm. However, the theorem's assumption of costless negotiation is often unrealistic, making it difficult to apply in practice. Despite this, it highlights the potential for market-based solutions to environmental and social problems.21

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Ronald Coase
…later became known as the Coase theorem, arguing that when information and transaction costs are low, the market will produce an efficient solution to the problem of nuisances without regard to where the law places the liability for the nuisance. His work was a call to legal scholars to consider…
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…later became known as the Coase theorem, arguing that when information and transaction costs are low, the market will produce an efficient solution to the problem of nuisances without regard to where the law places the liability for the nuisance. His work was a call to legal scholars to consider…
Read More

environmental economics
The Coase theorem
British American economist Ronald Coase developed the Coase theorem in 1960, and, although not a regulatory framework, it paved the way for incentive-driven, or market-based, regulatory systems. According to the Coase theorem, in the face of market inefficiencies resulting from externalities, private citizens…
Read More
British American economist Ronald Coase developed the Coase theorem in 1960, and, although not a regulatory framework, it paved the way for incentive-driven, or market-based, regulatory systems. According to the Coase theorem, in the face of market inefficiencies resulting from externalities, private citizens…
Read More

economics
Law and economics
…known ever since as the Coase theorem, and “The Problem of Social Cost” produced not just law and economics as a speciality study in economics but led to the new institutionalism in industrial organization referred to earlier.
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…known ever since as the Coase theorem, and “The Problem of Social Cost” produced not just law and economics as a speciality study in economics but led to the new institutionalism in industrial organization referred to earlier.
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negative externality
The Coase theorem suggests that the distribution of the costs of negative externalities can be negotiated by the affected parties directly with the offending party. For example, homeowners near a smelly cattle feedlot could agree to buy out the operation using money collected annually in a…
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The Coase theorem suggests that the distribution of the costs of negative externalities can be negotiated by the affected parties directly with the offending party. For example, homeowners near a smelly cattle feedlot could agree to buy out the operation using money collected annually in a…
Read More