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Coase theorem

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A concept often invoked in the economic analysis of law. Named after the Nobel laureate Ronald Coase (1911– ), it defines an “efficient” outcome as one in which the net sum of social wealth is maximized. The theorem is especially applicable to the law of tort, where it can be used to test the extent to which the rules produce such an “efficient” outcome. The simple version of the Coase theorem may be stated as follows: where there are minimal transaction costs and clearly defined property rights, the “efficient” result will occur regardless of the choice of legal rule. However, avoiding accidents through safety measures inevitably incurs costs; the approach adopted by Coase therefore is that an “efficient” rule is one that minimizes the sum of accident costs and prevention costs, because such a rule will normally reduce social wealth the least. Compare Pareto efficiency; Kaldor-Hicks efficiency.

Subjects: Social sciences

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