The Coase theorem is a proposition in economics that asserts that if parties to a dispute have complete information about one another’s preferences, and can trade without cost or impediment, they will reach an efficient outcome regardless of who is assigned the legal right to initiate action. The theorem is named after Ronald Coase, who first proposed it in 1960. It has been described as “one of the most important principles in economics”.
In simple terms, the Coase theorem says that if two people can strike a mutually beneficial deal, they will do so, even if the law says that only one of them is allowed to initiate the deal. For example, if I own a field and you want to graze your cows on it, we can reach an agreement that benefits both of us, even if the law says that you are not allowed to graze your cows on my field. The Coase theorem is sometimes used to justify free markets, as it suggests that market transactions will always be efficient, regardless of who has the legal right to initiate them.
Critics of the Coase theorem argue that it does not take into account the costs of negotiating and executing contracts, which can be significant. They also point out that in many real-world situations, parties to a dispute do not have complete information about one another’s preferences, and cannot trade without cost or impediment. For these reasons, critics argue that the Coase theorem is not a good justification for free markets.