Question: Q2. What is Wrong with the Coase Theorem?
Answer:
Usher indicates that there is a second common interpretation of the Coase Theorem, namely that:
"That any assignment of property rights gives rise to an efficient allocation of resources, on the understanding that efficiency requires some assignment of property rights."
But Usher points out that property rights are not necessary for this outcome to occur at all. Consider the case of a group of settlers who simultaneously arrive at a uninhabited territory to which none of the settlers have a claim. An efficient outcome can still take place even without an initial assignment of property rights. In Usher's words:
"The strictly-correct version of the Coase theorem boils down to the proposition if people can agree upon an efficient outcome, then there will be an efficient outcome."
The Coase Theorem "works" (if we can say that it works), because it implicitly assumes that agreements can be enforced by the state, at no cost to the government. This does not imply that a priori priority rights are necessary:
"It would be odd if a government prepared to enforce private contracts was not also prepared to establish property rights, but the contrary is imaginable if not realistic. Settlers occupy a territory without prior property rights, and the government stands ready to enforce whatever rights to property and whatever contracts the settlers establish among themselves.
Textbook descriptions of the Coase Theorem that emphasize the importance of property rights miss the mark, because if the Coase theorem shows anything, it shows the importance of costless enforcement of contracts.
That leads to one of the major failings of the Coase Theorem when it comes to dealing with externalities - externalities tend to be of a different nature, from a contractual sense, than do transactions lacking third party transactions.
Next: [http://economics.about.com/od/externalities/f/coase_external.htm]The Coase Treats Externalities The Same As Non-Externalities - But They Are Different[/link].
It is Misleading, Particularly Under the Second Definition
This is another argument, based on Dan Usher's 1998 paper The Coase theorem is tautological, incoherent or wrong. (PDF)Usher indicates that there is a second common interpretation of the Coase Theorem, namely that:
"That any assignment of property rights gives rise to an efficient allocation of resources, on the understanding that efficiency requires some assignment of property rights."
But Usher points out that property rights are not necessary for this outcome to occur at all. Consider the case of a group of settlers who simultaneously arrive at a uninhabited territory to which none of the settlers have a claim. An efficient outcome can still take place even without an initial assignment of property rights. In Usher's words:
"The strictly-correct version of the Coase theorem boils down to the proposition if people can agree upon an efficient outcome, then there will be an efficient outcome."
The Coase Theorem "works" (if we can say that it works), because it implicitly assumes that agreements can be enforced by the state, at no cost to the government. This does not imply that a priori priority rights are necessary:
"It would be odd if a government prepared to enforce private contracts was not also prepared to establish property rights, but the contrary is imaginable if not realistic. Settlers occupy a territory without prior property rights, and the government stands ready to enforce whatever rights to property and whatever contracts the settlers establish among themselves.
Textbook descriptions of the Coase Theorem that emphasize the importance of property rights miss the mark, because if the Coase theorem shows anything, it shows the importance of costless enforcement of contracts.
That leads to one of the major failings of the Coase Theorem when it comes to dealing with externalities - externalities tend to be of a different nature, from a contractual sense, than do transactions lacking third party transactions.
Next: [http://economics.about.com/od/externalities/f/coase_external.htm]The Coase Treats Externalities The Same As Non-Externalities - But They Are Different[/link].
