The Coase Theorem holds that, if Transaction Costs are low and Property Rights clearly defined, private bargains will ensure that the Market Equilibrium is efficient (see Efficient Equilibrium) even if there are externalities.
In looking at potential private solutions to Externality problems, Alex Tabarrok (reference below, video on right) examines the Coase theorem.
Tabarrok uses the example of the pollination industry in the U.S. Although economist James Meade had argued that the market would underprovide honey and pollination, but this proved to be wrong. The reason is that the buyer (farmer wishing to have his crops pollinated) can internalize the benefit because bees do not fly very far, transaction costs are low, and property rights are well defined.
Compare this with a situation where the property rights are ill defined.
Even when the Coase Theorem conditions are not perfectly operative, leading to the possibility of creating new markets to control externality problems.
From http://www.mruniversity.com/node/210562, accessed 6 May 2016.
- Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, what type of externality is produced?
Atlas topic, subject, and course
Alex Tabarrok, The Coase Theorem (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/coase-theorem-example, accessed 6 May 2016.
Page created by: Ian Clark, last modified 6 May 2016.
Image: Alex Tabarrok, minute 0.14 of The Coase Theorem (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/coase-theorem-example, accessed 6 May 2016.