CONCEPT
Coase Theorem
The proposition that when property rights are clear and transaction costs negligible, private bargaining produces efficient outcomes regardless of initial rights assignment—revealing transaction costs as the binding constraint.
The Coase Theorem, formalized by George Stigler from Coase's 1960 'Problem of Social Cost,' states that under conditions of zero
transaction costs and well-defined property rights, private parties will bargain to efficient resource allocation regardless of how rights are initially assigned. A polluting factory and downstream fishermen will negotiate the optimal pollution level whether the factory has the right to pollute or the fishermen have the right to clean water—when bargaining is costless, the efficient outcome emerges. The theorem's radical implication is not that government intervention is unnecessary (Coase emphasized transaction costs are rarely zero) but that transaction costs, not property rights assignment, determine whether markets can solve coordination problems. When transaction costs are high, market bargaining fails and governance structures (regulation, hierarchical organization, institutional mechanisms) must substitute. AI reduces some transaction costs (execution, coordination) while raising others (evaluation, judgment quality)—a pattern the theorem helps diagnose.
In The You On AI Field Guide
The theorem emerged from Coase's challenge to the Pigouvian tradition in welfare economics, which held that