Editing Coase theorem (section)

==The theorem==
Coase developed his theorem when considering the regulation of [[Radio frequency|radio frequencies]]. Competing radio stations could use the same frequencies and would therefore interfere with each other's broadcasts. The problem faced by regulators was how to eliminate interference and allocate frequencies to radio stations efficiently. What Coase proposed in 1959{{sfnp | Coase | 1959}} was that as long as [[property rights]] in these frequencies were well defined, it ultimately did not matter if adjacent [[radio station]]s interfered with each other by broadcasting in the same frequency band. Furthermore, it did not matter to whom the property rights were granted. His reasoning was that the station able to reap the higher economic gain from broadcasting would have an [[incentive]] to pay the other station not to interfere.

In the absence of transaction costs, both stations would strike a mutually advantageous deal. It would not matter which station had the initial right to broadcast; eventually, the right to broadcast would end up with the party that was able to put it to the most highly valued use. Of course, the parties themselves would care who was granted the rights initially because this allocation would impact their wealth, but the result of who broadcasts would not change because the parties would trade to the outcome that was overall most efficient. This counterintuitive insight—that the initial imposition of legal entitlement is irrelevant because the parties will eventually reach the same result—is Coase's invariance thesis.

Coase's main point, clarified in his article '[[The Problem of Social Cost]]{{sfnp | Coase | 1960}},' published in 1960 and cited when he was awarded the [[Nobel Prize]] in 1991, was that transaction costs, however, could not be neglected, and therefore, the initial allocation of property rights often mattered. As a result, one [[normative]] conclusion sometimes drawn from the Coase theorem is that liability should initially be assigned to the actors for whom avoiding the costs associated with the externality problem are the lowest.<ref>{{Cite web |last=Rosenzweig |first=Paul |date=2013-11-05 |title=Cybersecurity and the Least Cost Avoider |url=https://www.lawfaremedia.org/article/cybersecurity-and-least-cost-avoider |access-date=2022-11-12 |website=Lawfare |quote=So what is the right economic answer to the liability question in a world where transaction costs exist?  The answer to that question (and this is the last of Coase’s insights) is to make your best estimate of who the “least cost avoider” is – that is the person who will incur the least cost to avoid the harm under consideration.}}</ref> The problem in real life is that nobody knows [[ex ante]] the most valued use of a resource, and also that there exist costs involving the reallocation of resources by government. Another, more refined, normative conclusion also often discussed in [[law and economics]] is that government should create institutions that minimize transaction costs, so as to allow misallocations of resources to be corrected as cheaply as possible.

(1) In the case of zero transaction costs, no matter how the rights are initially allocated, negotiations between the parties will lead to the Pareto optimal allocation of resources;
(2) In the case of non-zero transaction costs, different rights allocation definitions will lead to different resource allocations;
(3) Because of the existence of transaction costs, different rights definitions and allocations will bring about resource allocation with different benefits. Therefore, the establishment of the property rights system is the basis for optimizing resource allocation (to Pareto optimal).

When faced with an externality, the same efficient outcome can be reached without any government intervention as long as the following assumptions hold:

# Property rights must be clearly defined
# There must be little to no transactions costs
# (Following 2.) There must be few affected parties (or else the transactions costs of organizing them gets to be too great).
# There must be no wealth effects. The efficient solution will be the same, regardless of who gets the initial property rights.

The Coase Theorem shows that the essence of the market is not price, but property rights. As long as there are property rights, people will naturally "negotiate" a reasonable price.