Essay About Coase Theorem And Transaction Costs Of Exchange

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About Coase Theorem
For nearly 60 years of attempts to formulate the Coase theorem (Coase Theorem).
After the publication of the work of Coase (Coase, R. 1960. The problem of social
cost. Journal of Law and Economics 3(1), October. 1-44.), which has never given the
definition of the theorem, also has a lot of interpretations. But the problem is that any
attempt to formulate the Coase theorem makes it either a false statement or tautology
(Coase Theorem. Robert D. Cooter. The World of Economics. Edited by J. Eatwell,
M. Milgate, P. Newman.).
First, let us dwell on the basic interpretations of the theorem. Microeconomics argues
that in a free market, resources move to where their use is most effective. Developing
this idea, Coase concluded on the distribution rules of movement of resources and
rights. After all, besides the right of ownership of the resources, there are rights to
own land and property, the right to protection and education, to various
compensations, the right to compliance with contract etc. There are three main
interpretations of the Coase theorem that always excites interest and admiration. Let
me formulate them.
1. From the point of view of efficiency it does not matter, how rights were originally
distributed, if you can freely share them. In a free market the allocation of rights
becomes optimal.
2. From the point of view of efficiency it does not matter, how rights were originally
distributed, if transaction costs of exchange are zero. By transaction costs meant the
effort and time spent on execution of market transactions. Costs can be very large, for
example, if the deal is made between a lot of players located far from each other.
Transaction costs reduce market efficiency.
3. From the point of view of efficiency it does not matter, how rights were originally
distributed, in case if, the exchange occurs in the conditions of a perfectly competitive
market. So, to ensure the effectiveness of rights, it is necessary to stimulate
competition, to achieve the existence of a greater number of buyers and sellers.
As an illustration of the theorem, Coase brings out an example of the movement of
rights of market players. Next to the farmers there lays a railway with locomotives,
from the pipes of which sparks fly. Periodically, the are fires in the fields that destroy
crops. Each of the parties can solve the problem, but it is associated with certain costs:
farmers can reduce crops near the railway, and the railway company can use spark
arresters or reduce the number of trains. Farmers have rights to compensation by
filing lawsuits against the company, and the company has the right to operate the
railway. According to the Coase theorem, no matter how the law interprets this case,
the market will determine rights movement in the direction of greater efficiency. If the
costs of the railway company in case of the ban of train moving will be less than the
cost of farmers, the company can pay the farmers a sum of money in exchange for a
commitment not to impose a ban on the movement of trains. Conversely, the company
may sell the right to farmers and to reduce or prevent movement at the site.
Regardless of the initial allocation of rights, the farmers and the railroad will carry out
the bargaining until a possible win. The benefits of exchange are exhausted, when the
rights are distributed efficiently.
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(2018, 04). Microeconomics. EssaysForStudent.com. Retrieved 04, 2018, from
“Microeconomics” EssaysForStudent.com. 04 2018. 2018. 04 2018 < "Microeconomics." EssaysForStudent.com. EssaysForStudent.com, 04 2018. Web. 04 2018. < "Microeconomics." EssaysForStudent.com. 04, 2018. Accessed 04, 2018. Essay Preview By: moli Submitted: April 12, 2018 Essay Length: 1,103 Words / 5 Pages Paper type: Essay Views: 319 Report this essay Tweet Related Essays Microeconomics Questions 1) a. If we do not have scarce resources, will we have a law of demand? Will we observe price rationing for goods? The law 1,806 Words  |  8 Pages The Microeconomics of the Video Game Industry Tommy Deen November 28, 2006 ECO 201 The Microeconomics of the Video Game Industry Video games have been around for years with many different types 1,051 Words  |  5 Pages Microeconomics Money, Business, and Competition are some of the fundamental concepts of capitalism. The U.S is a capitalist country, but also somewhat of an enforcer to 1,040 Words  |  5 Pages Microeconomics In the 80’s cabbage patches kid dolls was the holiday toy that was popular. There was so many different cabbage patches kid dolls that everybody 339 Words  |  2 Pages Microeconomics Business Project Business: Pet Waste Removal 1. CR Pet Waste Removal Specialists will offer residential and commercial waste removal service, including pick-up and transfer of any pet 902 Words  |  4 Pages Similar Topics Microeconomics Get Access to 89,000+ Essays and Term Papers Join 209,000+ Other Students High Quality Essays and Documents Sign up © 2008–2020 EssaysForStudent.comFree Essays, Book Reports, Term Papers and Research Papers Essays Sign up Sign in Contact us Site Map Privacy Policy Terms of Service Facebook Twitter