The Coarse Theorem

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The coarse theorem

In micro-economics various theories have been developed to explain different situations in the commodity market. However in this context the focus is how economic efficiency in a competitive market with externalities and how it influences the individual welfare with regard to property rights of various actors in the market. This situation is better explained by the coarse theory which states that a “if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property” (Posner, 35)

This theory was formulated by Ronald Coase in 1960 where he argued that if we lived in a world without or with minimal transaction costs, individuals would bargain with each another to come up with the most efficient distribution of the limited resources, regardless of the primary allocation. If a consideration of the situation is taken from the perspective of the definition of a market which generally is any medium either physical or virtual that economic transactions take place supported by the forces of demand and supply, the behavior of parties involved in the bargaining process regarding property rights is related to the most efficient and equally beneficial results.

The theory affirms that there is a situation in a market where economic actors either individuals or firms have a conflict over the property rights with the aim of negotiating the rights so that more benefits are received by all parties together than individual benefits. The theory is based on the following assumptions;

* Presence of externalities

* There is perfect competition

* There are conflicting property rights

* There is a perfect information about the market

* Zero transaction costs

However these assumptions do not hold in real world situation, for example, the transaction cost in most cases are not zero which the...