The Coase Theorem and Core Theory

Abstract

Abstract The writings of Ronald Coase, along with those of Armen Alchian and Harold Demsetz, on the theory of property rights, transaction cost economics, and the economics of institutions have yielded powerful insights and transformed many areas of economics. The seminal paper of Ronald Coase (Coase 1960, “The Problem of Social Cost,” Journal of Law and Economics, 3(1),1–44) not only clarified the notion of externality but also laid the foundations for a powerful theory of property rights and transaction cost economics. The insights of that paper have helped to shape the field of Law and Economics and also proved important in such fields as Environmental Economics, among others. It is worth mentioning that Coase’s work also led to our late colleague John Dales’ important book (Dales 1968, Pollution, Property, and Prices: An Essay in Policy-Making, University of Toronto Press) that formulated the idea of markets in pollution rights (cap-and-trade). In this note we will briefly review our work spanning many years linking the Coase Theorem to Cooperative Game Theory and Core Theory, emphasizing inter alia the importance of our approach for rationalizing property rights and contractual arrangements.