Coase Theorem: Definition & Example

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  • 0:00 Introduction to a…
  • 0:41 Definition of a Coase Theorem
  • 1:14 Examples of a Coase Theorem
  • 2:58 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

A Coase theorem is one way to settle disputes. In this lesson we will define the term and examine how it works in theory and in practice. The lesson will conclude with a summary and quiz.

Introduction to a Coase Theorem

We all have neighbors. Sometimes those neighbors are great. You know, the type that brings you a casserole after a life-changing event, like graduating from college or having a baby. There are also those neighbors that are terrible. They constantly complain about everything, like a branch from your tree that hangs over their property, or a lawn that separates your property that needs to be mowed. But what happens when you have a neighbor that falls in between? What happens when a conflict arises between two neighbors who are both levelheaded and open to finding a solution? When this happens, perhaps using the Coase theorem might be beneficial.

Definition of a Coase Theorem

Simply put, a Coase theorem can be used to settle disputes. Developed by Ronald Coase, the Coase theorem can be applied to those disputes over property rights we mentioned just a moment ago. A Coase theorem states that when there is a disagreement about property rights, those parties concerned can find a way to come to a mutually beneficial outcome by means of bargaining or negotiating terms. Keep in mind that in order for the theorem to be utilized, there cannot be any costs involved when negotiating a solution.

Examples of a Coase Theorem

Perhaps the best way to fully explain the concept of the Coase theorem is to apply it to an example. Take, for instance, a large factory that operates extremely noisy machines. A problem arises when neighbors in the community near the factory complain about the noise. How can this problem be resolved?

First, you must consider if operating those machines creates more value than the costs inflicted on the neighboring communities. In other words, are the machines creating a more valuable product then the costs of noise endured by those that live nearby? Or should the machines be forced to shut down because the value of operating those machines is less than the cost endured by the neighbors who have to listen to the loud noise?

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