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In economics, the Coase theorem gives conditions under which agents can allocate resources efficiently in the presence of externalities. It was first stated in 1966 by George Stigler, who was drawing from the work of Ronald Coase.

The theorem is foundational in law and economics and in the theory of the firm. Economists have used its insights to recommend changes in property law, and jurists have used it to analyze torts disputes. At various times both advocates of deregulation and advocates of intervention have claimed it supports their recommendations. It has been praised for its power to stimulate critical thinking in the classroom.

The 1991 Nobel Memorial Prize in Economic Sciences was given to Ronald Coase "for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy". A few months prior to receiving the Nobel Prize for economics, at the first meeting of the American Law and Economics Association, Coase was recognized with Guido Calabresi, Henry Manne and Richard Posner as a founding father of law and economics.

Statement
The theorem was not formalized by its early expositors, so its presentation varies. A representative version is:
 * Coase Theorem
 * If property rights are defined and enforced, and there is direct bargaining among the interested parties, and there are no transaction costs, then the outcome is efficient and invariant to the allocation of property rights.

The theorem shows bargaining can solve the problem of externalities. An externality is a cost or benefit borne by an agent who is not a party to an economic action. The solution is to find a way to make the outsider agent a party. Any agent who bears costs would like to receive payment for them. A contract could stipulate a payment compensating those who bear costs by charging those who enjoy the benefits of the externality. An efficient payment scheme will balance the marginal costs and benefits of the externality to all agents that gives each agent incentive to take into account his effect on others.

Such a payment scheme is the market price of the external goods. The contract solves the problem because it creates a "missing market" that would not otherwise give a market price for the value of the externality.

Assumptions
For the purposes of the theorem, the notion of a transactions cost should be understood quite generally. It is the value of the time, money and effort expended to complete an exchange.

Transactions costs include the costs associated with the formalization of the contract--lawyer fees. include the time cost for interested parties to search and match with one another, costs of monitoring and enforcement, costs of adverse selection, and costs due to the strategic behavior of agents such as free riding, hold-up and rent seeking.

In his 1937 essay, Coase enumerated three categories of transactions costs (1) the costs of discovering what the relevant prices are (2) the costs of negotiating the terms of an exchange, and (3) the costs of concluding the exchange

Additional conditions for the theorem were discovered in the course of criticism.

History
Stigler: "Under perfect competition private and social costs will be equal"

Demsetz: "There are two striking implications of this process that are true in a world of zero transaction costs. The output mix that results when the exchange of property rights is allowed is efficient and the mix is independent of who is assigned ownership (except that different wealth distributions may result in different demands)"

Calabresi: "Thus, if one assumes rationality, no transaction costs, and no legal impediments to bargaining, all misallocations of resources would be fully cured in the market by bargains"