Coase theorem

A concept, developed by Ronald Coase (see article), that deals with externalities. Coase thinks of the problem in terms of conflicting property rights such as the right of a factory to operate noisy machinery and the right of its neighbours to enjoy peace and quiet. If property rights are clearly delineated then, in the absence of transaction costs, bargaining should lead to an efficient outcome, such as the factory compensating its neighbours for the noise. Coase’s work on externalities, along with that on the theory of the firm, won him a Nobel prize in 1991.