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Coase theorem


The argument that externalities can be corrected by the market. Formally, the theorem states that in a competitive economy with symmetric information and zero transaction costs, the allocation of resources will be efficient and invariant with respect to legal rules of entitlement, or property rights. The implication of the theorem is that there is no need for policy intervention with regard to externalities except to ensure that property rights ai clearly defined and protected. Bargaining and negotiation will then ensure ai efficient allocation given the allocation of property rights.


Reference: Oxford Press Dictonary of Economics, 5th edt.