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The Coase Theorem, formulated by Ronald Coase, provides a framework for understanding how private negotiations can resolve externalities in an efficient manner, provided property rights are well-defined and transaction costs are negligible. In theory, this implies that regardless of the initial allocation of property rights, parties can bargain to achieve an efficient outcome. While this theorem has significant theoretical implications for environmental economics and the economics of social sectors, its practical application is subject to several notable limitations that restrict its usefulness in real-world scenarios. One of the primary limitations of the Coase Theorem is the assumption of zero or negligible transaction costs. In reality, transaction costs—which include the costs of negotiation, information gathering, enforcement of agreements, and monitoring compliance—can be substantial, particularly in the context of environmental and social externalities. For instance, pollution caused by a factory affecting thousands of households involves numerous parties, each with different levels of stake and varying ability to participate in negotiations. The complexity of coordinating such large groups can render bargaining infeasible. In the social sector, similar issues arise when addressing public health or education externalities, as organizing collective action among multiple stakeholders is often costly and time-consuming. These transaction costs may prevent the voluntary negotiation process envisaged by the theorem, making it an unrealistic solution for large-scale environmental and social problems. Another limitation is the difficulty of clearly defining and enforcing property rights. The Coase Theorem assumes that property rights are unambiguously established, enforceable, and transferable. However, in practice, especially in the environmental and social sectors, property rights can be ill-defined or contested. For example, access __________ __________ __________ ____ ________.
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