Table of contents

0. Basic Principles of Economics1h 5m
1. Reading and Understanding Graphs59m
2. Introductory Economic Models1h 10m
3. The Market Forces of Supply and Demand2h 26m
4. Elasticity2h 26m
5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
6. Introduction to Taxes and Subsidies1h 46m
7. Externalities1h 12m
8. The Types of Goods1h 13m
9. International Trade1h 16m
10. The Costs of Production2h 35m
11. Perfect Competition2h 23m
12. Monopoly2h 13m
13. Monopolistic Competition1h 9m
14. Oligopoly1h 26m
15. Markets for the Factors of Production1h 26m
16. Income Inequality and Poverty35m
17. Asymmetric Information, Voting, and Public Choice39m
18. Consumer Choice and Behavioral Economics1h 16m

7. Externalities

Private Solutions to Externalities: The Coase Theorem

Microeconomics

7. Externalities

Private Solutions to Externalities: The Coase Theorem

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The Coase Theorem

Brian Krogol

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The Coase Theorem Video Summary

The Coase Theorem provides a framework for understanding how private parties can resolve externalities without government intervention. Developed by economist Ronald Coase, who was awarded a Nobel Prize for his contributions, the theorem posits that if property rights are clearly defined and transaction costs are low, parties can negotiate solutions to externalities effectively.

To illustrate this, consider the example of a barking dog, which creates a negative externality for neighbors. The owner of the dog derives a benefit valued at $500 from owning it, while the neighbor experiences a cost of $800 due to lost sleep and stress. In a scenario where the owner has the right to make noise (no noise ordinance), the neighbor could offer the owner $600 to quiet the dog. This arrangement is beneficial for both parties: the owner receives more than their benefit from the dog, and the neighbor pays less than their maximum willingness to pay, resulting in an efficient outcome.

However, if the owner values the dog at $1,000, the neighbor's maximum offer of $800 would not be accepted, leading to no transaction. In this case, the neighbor must tolerate the barking, which is also an efficient outcome since the owner retains their property rights and the neighbor should have considered this when moving in.

In a different scenario where the neighbor has property rights due to a noise ordinance, the owner could pay the neighbor $900 to keep the dog. Here, both parties benefit: the owner values the dog at $1,000, and the neighbor receives $900, which exceeds their cost of $800. This demonstrates that regardless of who holds the property rights, as long as they are clearly defined and transaction costs are low, an efficient outcome can be achieved.

In summary, the Coase Theorem emphasizes the importance of clearly defined property rights and low transaction costs in facilitating private solutions to externalities. This approach allows parties to negotiate and reach mutually beneficial agreements without the need for government intervention.

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