AP MicroeconomicsMarket Failure & Government
Coase Theorem
The Coase theorem holds that if property rights are clear and bargaining is costless, private parties can negotiate to fix externalities efficiently.
It implies government intervention may be unnecessary when transaction costs are low and rights are well defined. The efficient outcome is reached regardless of who initially holds the rights. In practice, high bargaining costs and many affected parties limit its use.
Interactive graph
Externalities →
Drag the curves and see it for yourself.
Study module
Public Goods & Externalities →
Full lesson, practice questions, and flashcards.