Coase Theorem

Coase Theorem and Private Property Discussing how the Coase Theorem provides an alternative to government regulation and provision of services. How is the definition of private property a critical part of this analysis? The Coase Theorem holds that where transactions occur with no fixed transaction cost, the degree of economic gain from the transaction will depend on whether a producing party is legally responsible for any of the collateral damage caused by the transaction.

In other words, this 'externality' of collateral damage will have a cost which, if the producer is responsible for its coverage, must be factored into the economic value of the transaction. The text by Watkins provides a useful example of how this theorem functions and, more specifically, how its functionality relates to the way that private property is defined.

According to Watkins, in a hypothetical scenario where a cargo train sets fire to a particular crop supply each time it passes, the value of the cargo train's runs will be completely dependent on the externality of its responsibility to the owners of said crop. According to Watkins, "The profit of the railway company corresponds to the net social benefit of running the trains.

In this case it makes a great deal of difference (in terms of the number of trains run) as to whether the railway company is liable for the crop damage." (Watkins, p. 1 Under the legal conditions of the United States, where private property is defined with a distinct concreteness, we can presume that the railway company would be responsible to the farm for its damaged crops. The result would be the calculation of this externality into transaction costs. This differs substantially in cultures where private property is defined less concretely.

Indeed, in many developing nations, state-owned operations such as this railroad might be, are often given far-reaching freedoms to produce their services or products without responsibility to the private property impacted. This is a concept that especially applies to the rampant environmental abuses that often negatively impact populations in impoverished nations with undeveloped regulatory conditions. This underscores the relevance of defining private property in western legal culture.

The implication of the Coase Theorem, when held in correspondence to a western definition of private property, is that it offers sound economic protection to private citizens. According to Friedman, "in an ideal economic system, goods worth more than they cost to produce get produced, goods worth less than they cost to produce do not; this is part of what economists mean by economic efficiency.

In a perfectly competitive private property system, producers pay the value of the inputs they use when they buy them from their owners (wages to workers in exchange for their labor, rent.