Much ado about nothing? The controversy over the validity of the Coase theorem

Abstract

The controversy over the theoretical validity of the ‘Coase theorem’ is closely linked to the controversy over the correct statement of it, since the principal need is to determine what valid generalizations can be made on the basis of Coase’s 1960 examples. The present article does not aim to review the content of the controversy as such, but rather to question the reasons behind it: why so much noise about a proposition that is patently unrealistic (because of its assumption of zero transaction costs)? I argue that the prominence of the controversy, namely of the question of the validity (and statement) of the ‘Coase theorem’, can be analytically explained by the roles this ‘theorem’ plays in microeconomics: it is critical (of the standard theory of market failures), heuristic (drawing out the consequences of the efficiency assumption), and normative (conveying an optimistic view of the efficiency of exchange). I stress that these roles depend on the nature of the exchange defined in the formulation of the ‘theorem’. And I conclude that they rest upon the cooperative bargaining version, and therefore on an optimistic belief in the ability of people to find efficient agreements.