Coase theorem

Coase theorem. Asserts that if transaction costs are nil and if property rights (i.e. rights to pollute or to be protected from pollution) are clearly defined and allocated, then agents will exchange that right and the result (the level of pollution) will be optimal and independent from the initial allocation of rights. It opposes standard welfare economics, in which pollution is viewed as an obstacle to the efficiency of markets, since it has no price (it is an "externality"). This proposition was named "Coase Theorem" by Stigler (1966), after Ronald Coase's "The Problem of Social Cost" (1960). In that article, Coase illustrated it, but provided no general statement nor demonstration; and above all he insisted on the importance of transaction costs that may impede exchanges. Until today, the Coase theorem has been considered either false or tautological (it suffices to define transaction costs as impeding any mutually advantageous exchange to "prove" efficiency). It is nevertheless often referred to to assert the efficiency of exchanges of ecological or environmental services for money, even without the assumptions of perfect competition. It partly originated the idea of tradable emission permits, and more directly payments for ecosystem services.