The Coase Theorem As Fiction


When externalities are present and transaction costs are absent, private parties will strike welfare-enhancing deals regardless of who owns what. In a frictionless world, bargaining leads to efficiency. That is the essence of the Coase Theorem, and it is fiction, according to Steven Medema. The world is not frictionless, which is why the Theorem is not applicable to it. And yet the theorem, distorted versions of it, entered into textbooks and came to captivate the minds of economics and legal scholars alike. Medema investigates how that came to be. Writing the intellectual history of the Coase Theorem — this is new economic thinking.

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