Editing Coase theorem (section)

=== Criticisms of the theorem ===

In his later writings, Coase himself expressed frustration that his theorem was often misunderstood. Some mistakenly understood the theorem to mean that markets would always achieve efficient results when transaction costs were low, when in reality his point was almost the exact opposite: because transaction costs are never zero, it cannot be assumed that any institutional arrangement will necessarily be efficient. Others have argued that because transaction costs are never zero it is always appropriate for a government to intervene and regulate, though Coase believed that economists and politicians "tended to over-estimate the advantages which come from governmental regulation."{{sfnp|Coase|1960|p=18}} What Coase actually argued is, that it is important to always compare alternative institutional arrangements to see which would come closest to "the unattainable ideal of the world of zero transaction costs."{{sfnp|Merrill|Smith|2017|p=38}}

While most critics find fault with the applicability of the Coase Theorem, a critique of the theorem itself can be found in the 1981 work of the critical legal scholar [[Duncan Kennedy (legal philosopher)|Duncan Kennedy]], who argues that the initial allocation always matters in reality.<ref name="DKennedy">{{Cite journal|year=1981|title=Cost-Benefit Analysis of Entitlement Problems: A Critique|url=http://duncankennedy.net/documents/Photo%20articles/Cost-Benefit%20Analysis%20of%20Entitlement%20Problems_A%20Critique.pdf|journal=Stanford Law Review|volume=33|issue=3|pages=387–445|doi=10.2307/1228354|jstor=1228354|author=Kennedy, Duncan}}</ref> This is because psychological studies indicate that asking prices often exceed offer prices, due to the so-called [[endowment effect]]. Essentially, a person who already has an entitlement is likely to request more to give it up than would a person who started off without the entitlement. The validity of this theoretical critique in practice is addressed in a later section.

An additional critique of the theorem comes from [[New institutional economics|new institutional]] economist [[Steven N. S. Cheung]] who thinks that private property rights are institutions that arise to reduce transaction costs. The existence of private property rights implies that transaction costs are non-zero. If transaction costs are really zero, any property rights system will result in identical and efficient resource allocation, and the assumption of private property rights is not necessary. Therefore, zero transaction costs and private property rights cannot logically coexist.<ref>{{Cite journal |last=Cheung |first=Steven N. S. |date=2020-12-01 |title=On a Fallacy in the Coase Theorem and the Theorem of Transaction Costs Substitution |url=https://www.degruyter.com/document/doi/10.1515/me-2020-0013/html |journal=Man and the Economy |language=en |volume=7 |issue=2 |doi=10.1515/me-2020-0013 |issn=2196-9647}}</ref>

Lastly, using a game-theoretic model, it has been argued that sometimes it is easier to reach an agreement if the initial property rights are unclear.<ref>{{Cite journal|last=Schmitz|first=Patrick W.|date=2001|title=The Coase Theorem, Private Information, and the Benefits of Not Assigning Property Rights|journal=European Journal of Law and Economics|language=en|volume=11|issue=1|pages=23–28|doi=10.1023/A:1008709628107|s2cid=195241480|issn=0929-1261}}</ref>