Legal Theory Lexicon: The Coase Theorem
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But what if there are positive transaction costs?
Of course, in the real world, there will almost always be positive transaction costs. In some cases, when transaction costs are low, the assignment of the entitlement will not affect the outcome, because an efficient bargain can still be struck.
In other cases, however, the assignment of the entitlement will determine whether we can reach the efficient outcome. When transaction costs are high, there may be one allocation of the entitlement that will permit an efficient outcome, and another allocation that will not. A good deal of the action in law and economics concerns situations of this type.
“Transaction costs economics” explores these issues. This approach is also sometimes called “the new insittuitonal economics.”
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