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Coase Theorem |
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Coase Theorem was propounded by Ronald Coase. This theory tries to analyze the profit an economy can realize based on allocation of resources or outcomes in the presence of external factors.
This theorem was propounded in the year 1959-60. Ronald Coase was awarded the Noble Prize for this in the year 1991. This theorem states that if transactions costs are zero, then the amount of production of goods and services in an industry, which has external factors(called externalities) affecting it, does not depend on the party liable for the cost of any negative externalities. But again, the party causing the externality must be legally liable for the same.
The crux of this theorem is that the same level of production will be achieved irrespective of whether cost of negative externalities is borne by the party responsible for it or not. Another part of this theory is that the amount of production generated will be socially optimal. Another way of explaining this theorem is that a balance must be struck between a company’s cost of transactions and the scope to produce goods and services in house.
Originally known as the Problem of Social Cost, this theorem is presently the basis for analysis of government regulations, particularly with respect to externalities. This theory was initially put across as a paper and was developed by other theorists as a theory.
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