Coase Theorem
Plain definition
The Coase theorem states that if property rights are well defined and transaction costs are low, private bargaining can reach an efficient outcome regardless of who initially holds the rights.
In economics
Ronald Coase's insight challenged the view that externalities always need government intervention: with clear rights and cheap negotiation, parties internalize the externality themselves. In practice, high transaction costs (many affected parties) often block this solution.
Example
If a rancher's cattle trample a farmer's crops and rights are clear, they can negotiate — either the rancher pays for damage or the farmer pays for fencing — reaching the efficient outcome either way.
The theorem does not say bargaining fixes everything; it only works when property rights are clear and transaction costs are low, which excludes most large-scale pollution problems.