Property Rights and the Coase
Theorem
Law and Economics-Charles W. Upton
The Coase Theorem
Number of
Steers
Annual Crop
Loss (Tons)
Crop Loss per
Incremental
Steer (Tons)
1
2
3
4
1
3
6
10
1
2
3
4
Property Rights and the Coase
Theorem
Recall
theCoase
basic Coase
The
Theorem
Theorem: once
property
rights
are
Number of
Annual Crop
Crop Loss per
established,
the Incremental
Steers
Loss (Tons)
Steer (Tons)
allocation of resources
1
1
1
will
be Hicks-Kaldor
2
3
2
3
6
3
Optimal.
4
10
4
The crop loss will be
non-optimal if property
rights are unclear.
Property Rights and the Coase
Theorem
Recall
theCoase
basic Coase
The
Theorem
Theorem: once
property
rights
are
Number of
Annual Crop
Crop Loss per
established,
the Incremental
Steers
Loss (Tons)
Steer (Tons)
allocation of resources
1
1
1
However,
this
will
2 be Hicks-Kaldor
3
2
principle
does
3
6
3
Optimal.
4
10
4
not hold if
The crop loss will be transaction
non-optimal if propertycosts are high.
rights are unclear.
Property Rights and the Coase
Theorem
Recall
theCoase
basic Coase
The
Theorem
• The
simple once
version of the Coase
Theorem:
Theorem
holds
that
economic
output
property
rights
are
Number of
Annual Crop
Crop Loss per
will
be the
what the
established,
the no matter
Steers
Losssame
(Tons)
Incremental
Steer (Tons)
property
rights
are.
allocation of resources
1
1
1
•will
A
general
version says
the
be Hicks-Kaldor
2 more
3
2
3
6
3
outcome
will
be
efficient.
Optimal.
4
10
4
The crop loss will be
non-optimal if property
rights are unclear.
Property Rights and the Coase
Theorem
The Coase Theorem
• The simple version of the Coase
Recall the basic Coase
Theorem
holds
that
economic
output
Number
of
Annualonce
Crop
Crop Loss per
Theorem:
will be the
no resort
matter
what
Think
of the
and
thethe
Steers
Losssame
(Tons)
Incremental
property rights are Steer (Tons)
property
rights are.
railroad.
Whichever way
1 established,
1 the
1
• A
general
version
says
the
assign
the property
2 morewe
3
2
allocation
of resources
3
6
3
outcome
will
be
efficient.
rights
will
influence
4
10
4 income
will be Hicks-Kaldor
and hence the demand for
Optimal.
(say) coal. In turn, the
will be
The cropspillover
loss willeffects
be
seen
throughout society.
non-optimal
if property
Property Rights and the Coase
Theorem
rights are unclear.
The Coase Theorem
Some authors talk about
Number of
Annual Crop
Crop Loss per
Steers
Loss (Tons)
Incremental
social norms
as a way
of
Steer (Tons)
obtaining efficiency without the
1
1
1
2 of bargaining
3
2
use
or property
3
6
3
rights.
4
10
4
Property Rights and the Coase
Theorem
The Coase Theorem
Some authors talk about
Number of
Annual Crop
Crop Loss per
Steers
Loss (Tons)
Incremental
social norms
as a way
of
Steer (Tons)
obtaining
efficiency
without
the the
For
example
if
we
all
obey
1
1
1
2 of bargaining
3
2
use
or
property
commandment
“Thou3 Shalt
3
6
4
10
4 or
Not rights.
Steal”
on moral
religious grounds, the problem
with Farmer A and Farmer B
disappears.
Property Rights and the Coase
Theorem
Transaction Costs
• We want to allocate resources to their best
use, and property rights will help us do that.
However, there are Transactions Costs
– Search Costs
– Bargaining Costs
– Enforcement Costs
Property Rights and the Coase
Theorem
Transaction Costs
• If Transaction Costs ≈ 0
– Allocation of property rights irrelevant.
– Simply allocate property rights and let the
bargaining process allocate the property
Property Rights and the Coase
Theorem
Transaction Costs
• If Transaction Costs ≈ 0
– Allocation of property rights irrelevant.
– Simply allocate property rights and let the
bargaining process allocate the property
• If Transaction Costs >0
– Allocation of property rights matters. We want
to get it right.
Property Rights and the Coase
Theorem
Transaction Costs
• Can we lower Transaction Costs?
Property Rights and the Coase
Theorem
Transaction Costs
• Can we lower Transaction Costs?
– To some extent.
Property Rights and the Coase
Theorem
Transaction Costs
The size of transaction costs
depends on whether we are
• Can we lower Transaction Costs?
talking about a homogenous
– To some extent.
or heterogeneous good.
Property Rights and the Coase
Theorem
Transaction Costs
The size of transaction costs
depends on whether we are
• Can we lower Transaction Costs?
talking about a homogenous
– To some extent.
or heterogeneous good.
• Homogenous Good: one where
there are many similar items. (A
share of IBM stock or a can of
soda).
• Heterogeneous Good: one where
each item is unique. (A house or
Rights and the Coase
a pieceProperty
of land).
Theorem
The Coase Theorem and Transaction
Costs
• Can we lower Transaction Costs?
– To some extent.
• Can we “lubricate” the bargaining process?
– To some extent
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
• Smith owns aCosts
piece of land that is
worth $100 to him and $150 to
• Can Jones.
we lower
Transaction
Costs?that
Efficiency
requires
sell to Jones
– ToSmith
some extent.
• Can we “lubricate” the bargaining process?
– To some extent
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
• Smith owns aCosts
piece of land that is
worth $100 to him and $150 to
• Can Jones.
we lower
Transaction
Costs?that
Efficiency
requires
sell to Jones
– ToSmith
some extent.
• Can we
“lubricate”
the bargaining
process?
• Alas,
they despise
each other.
– To some extent
Property Rights and the Coase
Theorem
•
Transaction
Costs
Smith owns a piece of land that is
worth $100 to him and $150 to
• Can Jones.
we lower
Transaction
Costs?that
Efficiency
requires
sell to Jones
– ToSmith
some extent.
• Can we
“lubricate”
the bargaining
process?
• Alas,
they despise
each other.
– To •some
extent
Intermediaries,
such as lawyers
and real estate agents can help
get the two together.
Property Rights and the Coase
Theorem
•
Transaction
Costs
Smith owns a piece of land that is
worth $100 to him and $150 to
• Can Jones.
we lower
Transaction
Costs?that
Efficiency
requires
sell
to Jonesthe problem of
– ToSmith
some extent.
Consider
the Smiths,
selling
their
• Can we
“lubricate”
the bargaining
process?
• Alas,
they
despise
each
other.
house of 40 years to
– To •some
extent
Intermediaries, such as lawyers
move
in
to
a
retirement
and real estate agents can help
home,
and the Wilsons, a
get the
two together.
young couple considering
buying it.
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
Costs
• Can we lower Transaction Costs?
– To some extent.
• Can we “lubricate” the bargaining process?
– To some extent.
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
Costs
• Can we lower Transaction Costs?
– To some extent.
• Can we “lubricate” the bargaining process?
– To some extent.
• Can the legal system get it right when the
bargaining system fails?
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
Costs
• Can we lower Transaction Costs?
– To some extent.
• Can we “lubricate” the bargaining process?
– To some extent.
• Can the legal system get it right when the
bargaining system fails?
– To some extent.
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
Costs
• Can we
lower
Transaction
Two
women
claimedCosts?
to be the
mother of an infant
– To some extent.
• Can we “lubricate” the bargaining process?
– To some extent.
• Can the legal system get it right when the
bargaining system fails?
– To some extent.
Property Rights and the Coase
Theorem
The
Coase
Theorem
and
• Two
women
claimed to
beTransaction
the
Costs
mother of an infant
•• Can
we lower
Transaction
Costs?
Solomon
offered
to divide
the child in
Theextent.
real mother revealed
–half.
To some
herself
by offeringthe
tobargaining
give up the
• Can
we “lubricate”
process?
–child.
To some extent.
• Can the legal system get it right when the
bargaining system fails?
– To some extent.
Property Rights and the Coase
Theorem
The
Coase
Theorem
andbeTransaction
• Two
women
claimed to
the
Costs
mother of an infant
• Solomon offered to divide the child in
• Can we lower Transaction Costs?
half. The real mother revealed
– To some extent.
herself by offering to give up the
• Can
we “lubricate” the bargaining process?
child.
To some
extent. did not make the
• –Note:
Solomon
• Can
the legal
right when
decision,
butsystem
used get
theitprocess
to the
bargaining
systemtofails?
get the women
reveal facts.
– To some extent.
Property Rights and the Coase
Theorem
The
Coase
Theorem
andbeTransaction
• Two
women
claimed to
the
Costs
mother of an infant
• Solomon offered to divide the child in
• Can we lower Transaction Costs?
half. The real mother revealed
– To some extent.
call this
the
herself by offeringWe
to give
up the
• Can
we “lubricate” theWisdom
bargainingofprocess?
child.
To some
extent. did not
Solomon.
• –Note:
Solomon
make the
• Can
the legal
right when
decision,
butsystem
used get
theitprocess
to the
bargaining
systemtofails?
get the women
reveal facts.
– To some extent.
Property Rights and the Coase
Theorem
The
Coase
Theorem
andbeTransaction
• Two
women
claimed to
the
Costs
mother of an infant
• Solomon offered to divide the child in
• Can we lower Transaction Costs?
half. The real mother revealed
– To some extent. Today, information
herself by offering to give up the
• Can
we “lubricate”
the bargaining
costs
are lower.process?
A
child.
To some
extent. modern
Solomon
• –Note:
Solomon
did not make
the
would
order
• Can
the legal
get
itprocess
right when
decision,
butsystem
used
thesimply
to the
a DNAfacts.
test.
bargaining
systemtofails?
get the women
reveal
– To some extent.
Property Rights and the Coase
Theorem
The Coase Theorem and Transaction
Costs
• Can we lower Transaction Costs?
– To some extent.
• Can we “lubricate” theAnd
bargaining
process?
to some
– To some extent.
extent, the
courts
should
• Can the legal system get
it right
when the
bargaining system fails? not try.
– To some extent.
Property Rights and the Coase
Theorem
End
©2004 Charles
W. Upton
Property Rights and the Coase
Theorem