Coase Theorem

1
Coase Theorem
2
Coase Theorem
Version 1

• The delimitation (??) of rights is an essential
  prelude (??) to market transactions but the
  ultimate result (which maximize the value of
  production) is independent of the rights.

3
Coase Theorem
Version 2

• Clear delimitation of rights and low enough
  transaction costs are pre-requisites (????) to
  market transaction.

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Coase Theorem
Version 3

• If property rights are clearly delineated and all
  costs of transactions are zero, then resource use
  will be the same regardless of who owns the
  property rights and then the economic efficiency
  (Pareto Condition) will be satisfied.

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Pigovian argument
Coasian argument
Government intervention

• Is the govt well-informed?
• Could the govt make mistakes?

Allocative inefficiency
Allocative Efficiency

• Why dont people realize the potential gain?

Market failure
Exchange of property rights

• Could market transactions take place?

• Are property rights well-defined?
• Are transaction costs low enough?

Externality (Divergence between private and
social cost)
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Property Rights

• It is a kind of rules of game that delineates
  (??) the constraints faced by any individual by
  specifying what can be done and what cant.
• It also assigns or allocates responsibility.
• Property rights that serve as constraints which
  would affect human behaviours.

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Private Property Rights

• When property rights are well-defined, the
  property owner has

• exclusive right to use the property,
• exclusive right to transfer the ownership, and
• exclusive right to earn income from the property

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Externality in reality?

• Property rights are not well defined or costs of
  transaction are prohibitively high
• Market exchange is not possible
• No market failure at all
• Government failure is possible
• The so-called inefficiency may be an efficient
  outcome

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Roles of the Government

• Government, as a super-firm, could allocate the
  use of resources.
• Without sufficient amount of information, govts
  could easily make wrong decisions.
• The primary functions of a govt are to define
  clearly property rights, to protect and enforce
  them.

10
Roles of the Government

• When property rights are ill-defined, or
  transaction costs are prohibitively high, govt
  may be an alternate way to allocate resources
  when externality exists.
• However, if the costs of using govt are also
  prohibitively high, the existence of externality
  may be an efficient outcome.

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Prof. Cheungs idea

• Basically, the Coase Theorem is empty in
  explaining human behaviour.
• It just emphasize the pre-requisites of market
  exchange which were overlooked by many
  economists.
• Moreover, there is a logical mistake
• if transaction costs are zero, there will be no
  need to define property rights well because all
  kinds of system could operate efficiently.

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Prof. Cheungs idea

• To put it simple and clear
• if transaction costs are zero, there will be no
  system at all no private property rights, no
  markets, no firms, no governments!
• It would be more interesting and useful to
  explain human behaviour when transaction costs
  are positive and people try to minimize such
  costs!