Coase Theorem: Provision of an Alternative Government

Coase Theorem: Provision of an Alternative Government Regulation and Provision of Services The objective of this work in writing is to discuss how the Coase Theorem provides an alternative to government regulation and provision of services and to examine how the definition of private property is a critical part of this analysis.

Dixit and Olson (2000) state that the most basic claim of Coase Theorem is "that only transaction (or bargaining) costs can prevent voluntary bargaining from attaining Pareto-efficient outcomes." (p.311) The Argument of Coase The work of Ronald Coase entitled "The Problem of Social Cost" is such that introduced an idea of critical importance.

According to Dixit and Olson (2000, p.310) the argument stated by Coase is "given the precise allocation of property rights and the absence of any costs of information or negotiation, two parties would arrive at a bargain that would internalize any externalities between them." (p.310) Coase is reported to have taken for granted "a government that allocated the property rights between the parties and a court that enforced their agreed bargain" resulted in an outcome that was efficient "whatever the initial allocation of legal rights." (Dixit and Coase, 2000, p.310) The analysis of Coase is reported to have "extended beyond two-party externalities to larger groups and even to amorphous externalities or public bads like air pollution." (Dixit and Coase, 2000, p.310) Transaction costs are such that will experience an increase "when the number of people in the group impacted by the externalities or served by the public good are large." (Dixit and Coase, 2000, p.310) Coase held that economic activity will go on "by whatever, means, market or non-market that minimizes total costs; that is, production plus transaction costs." (Dixit and Coase, 2000, p.310) Coase stated the argument that government is needed to use taxes and subsidies to internalize externalities was "fundamentally unsatisfactory; even in the presence of externalities and public goods, the rational bargaining of the parties in the economy would bring efficiency without any governmental intervention." (Dixit and Coase, 2000, p.310) II.

Property Rights The Coase Theorem holds that if property rights "are well defined, and no significant transaction costs exist, an efficient allocation of resources will results seen with externalities." (Hahnel and Sheeran, nd, p.1) Coase points out that in a great deal of cases negotiation between the parties can result in an approximation of the efficient resolution of the externality and that this result will be arrived at "whatever the initial assignment of property rights." (Hahnel and Sheeran, nd, p.1) The Coase Theorem holds that in the absence of transaction costs "affected parties to an externality will agree on an allocation of.