Coase Theorem: An Option of Government Regulation

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Table of Contents

Introduction: Coase Theorem
Coase Theorem and Governmental Regulation: Alternative Solutions
Delineation of Property Rights and the Following Benefits
Conclusion: Coase Theorem and its Plausibility
Reference List

Introduction: Coase Theorem

Definition

There are several ways to define the phenomenon; traditionally, the Coase Theorem is identified as the statement that “in the absence of government authority, the private sector will step in to provide alternative services, depending on the transaction costs” (Skousen, 2013, p. 454). As a matter of fact, it is common knowledge that Coase himself was against the simplified interpretation of his theorem, claiming that the transaction costs can be disregarded, the simplified version went against what Coase was trying to get across (Farber, 1997). According to the author, the theorem was supposed to prove that on no account could the transactional costs be dismissed (Skousen, 2013).

Thesis statement

Since, according to the Coase Theorem, the economic efficiency of a company is highly dependent on the so-called externalities, which are, in their turn, often relocated by the government, it is imperative that private property rights should be defined as precisely as possible, which makes the definition of the aforementioned rights the key to successful entrepreneurship.

Coase Theorem and Governmental Regulation: Alternative Solutions

The Coase theorem does not only stress the necessity to refrain from the traditional concept of governmental regulation of private companies and their transactions but also suggests an alternative for modern SMEs to comply with. However, Coase does not suggest that the influence of the government should be eliminated completely; instead, Coase offers the scenario, in which the government should coordinate the transaction costs by driving them to zero. This can be achieved by introducing new institutions into the market. In other words, the government should coordinate the externalities, according to Coase (Skousen, 2013).

Delineation of Property Rights and the Following Benefits

As has been explained above, the definition of the property plays a major part in the creation of a proper environment for SMEs, according to the Coase Theorem. Yet, apart from the location of the phenomenon of property, the delineation of its rights is also imperative for proving the importance of transaction costs, as Coase explained. According to what Skousen says, resources should be measured in terms of individual activities within the private entrepreneurship field (Skousen, 2013). As a result, the owners of SMEs will be able to enjoy more freedom in terms of their financial transactions and enter the global market without suffering as many costs as they are subjected to once the government has the ultimate control over the key externalities.

Conclusion: Coase Theorem and its Plausibility

One must admit that, as a concept, the Coase Theorem works perfectly well. The idea of reducing the power that the state government has over the market and private entrepreneurs sounds very reasonable. More to the point, it is crucial that the Coase Theorem does not take the government out of the picture entirely – quite on the contrary, the author suggests that it should play a very specific role in the market economy by executing control over the existing externalities.

However, one must also keep in mind that, like many other theories, the Coase Theorem views the concept of private entrepreneurship within the realm of the global economy from a slight idealist perspective (Skousen, 2013). Nevertheless, the theorem provides a viable solution to the problem that has been brewing for quite long and hindering the progress of private entrepreneurship for both SMEs and large companies all over the world.

Reference List

Farber, D. A. (1997). Parody lost/pragmatism regained: The ironic history of the Coase theorem. Virginia Law review, 83(2), 397–428. Web.

Skousen, M. (2013). Economic logic, revised. (4th ed.). Washington, DC: Regnery Publishing. Web.

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