The Coase Theorem argues that in the absence of government authority, the private sector will

step in to provide alternative services, depending on the transaction costs (Skousen, 2010). In
The Nature of the Firm, Coase explained that firms exist because they reduce the transaction
costs that emerge during production and exchange, capturing efficiencies that individuals cannot
(Economic Insights).
The "Coase Theorem" given by Ronald Coase, describes the economic efficiency of an
economic allocation or outcome in the presence of externalities. The theorem states that when
trade in an externality is possible and there are no transaction costs, bargaining will lead to an
efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to
bargaining or poorly defined property rights can prevent bargaining.
The Coase Theorem implies that greater efficiency and prosperity can be obtained by
reducing and eliminating transaction costs. Bureaucratic hurdles erected by government and the
legal system increase transaction costs and reduce efficiency and prosperity. Society as a whole
would be better off if transaction costs were minimized and wealth is lost by impeding the ability
of people to negotiate private contracts among themselves. The role of government is to increase
prosperity should focus on lowering transaction costs and not raising them.
Private property is defined as any tangible and intangible things owned by individuals or
firms over which their owners have exclusive and absolute legal rights, such as land, buildings,
money, copyrights, patents, etc. (BusinessDictionary.com). Property rights need to exist and it is
only the government that can guarantee property rights. The Coase theorem does not rule out a
role of the government, but just says that under some specialized circumstances private
transactions may be more efficient than anything that involves a third party. It is believed that
whomever actually own the property rights to a property that some sort of economic activity will
occur. Assigning property rights greatly enhances the ability to resolve disputes over the use and
abuse of resources. If everyone is aware of who owns what they are less likely to abuse and
damage that property to a certain degree.




















Bibliography
(n.d.). Retrieved January 22, 2013, from BusinessDictionary.com:
http://www.businessdictionary.com/definition/private-property.html
Economic Insights. (n.d.). Retrieved January 21, 2013, from Grantham University:
https://content.grantham.edu/at/BA540/TheCoaseTheorem.pdf
(2010). Economic Logic. In M. Skousen, Economic Logic. Washington: Capital Press.