ABSTRACT
The Coase Theorem (Coase, 1960) has been traditionally interpreted1 as a theory of the superiority of free market exchange over state regulatory intervention for externalities’ absorption. As Coase (1988) has later pointed out, his 1960 article has been widely cited and discussed only with reference to the first part of the analysis (concerning a world with zero transaction costs), ‘neglecting other aspects of the analysis’2 such as those remarking ‘the fundamental role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system’. The Coase Theorem, which thus covers only a part of a more general argument, could be formulated in the following way: ‘if transaction costs were assumed to be zero and the rights of the various parties well defined, the allocation of resources would be the same’ independently of the initial allocation of rights. The consequence of this assertion is that
how the rights will be used depends onwho owns the rights and the contractual arrangements into which the owner has entered. If these arrangements are the result of market transactions, they will tend to lead to the rights being used in the way which is the most valued, but only after deducing the costs involved in making these transactions. Transaction costs therefore play a crucial role in determining how the rights will be used.
