the idea that private negotiations between people will lead to an efficient resolution of externalities regardless of who has the property rights as long as the property rights are defined.
when bargaining is costless and property rights can be assigned without difficulty, the amount of an externality-generating activity will not depend on who is assigned the property rights
(Hackett, 1998, chapter 6). Named after economist Ronald Coase, the Coase theorem starts from the premise that a complete set of private property rights can be assigned to aspects of the environment, that polluters and those harmed by pollution can negotiate at very low cost, and that "free rider" effects among multiple parties on either side of the negotiation are minimal. Under these conditions the central finding is that private parties can negotiate a solution equally as efficient as that which would result from more centralized regulatory processes using benefit/cost analysis.
The proposition that if property rights exist, only a small number of parties are involved, and transactions costs are low, then private transactions are efficient and the outcome is not affected by who is assigned the property right. (p. 188)
The proposition that if property rights exist and transactions costs are low, private transactions are efficient. Equivalently, with property rights and low transaction costs, there are no externalities.
In law and economics, the Coase theorem, attributed to Ronald Coase, relates to the economic efficiency of a government's allocation of property rights. In essence, the theorem states that in the absence of transaction costs, all government allocations of property rights are equally efficient, because interested parties will bargain privately to correct any externality. Obstacles to bargaining are often sufficient enough to prevent this efficient outcome, leaving normative Coase theorem to prevail over positive Coase theorem.
Provided that transaction costs are negligible, an efficient solution to an externalities problem is achieved as long as someone is assigned property rights, independent of who is assigned those rights. Cite: Public Finance, Rosen; Gayer, 9th edition.
