Is the Coase Theorem Tenable If All Its Assumptions Hold?

Abstract

This paper studies two cases designed by Coase, analyses the effects of legal rules of external damage liability on the costs and resource allocation of the parties at issue, and demonstrates that the Coase Theorem is not tenable even if all its assumptions or conditions hold. The role of transactions in altering resource allocation and modifying legal rules is examined and it concludes that the outcomes of external right transactions cannot be independent of the legal basis of transaction even if transaction cost is zero. The analysis of the external cost shows that external damage does not impose the same amount of cost on the damager under different rules, reveals the conceptual flaw in Coase’s opportunity costs approach, and concludes that taking opportunity costs into consideration cannot equalize private cost of the damager with social cost.