Coase Theorem, Competitive Market and Products Liability Law
20 Isr. L. Rev. 39 (1985)
10 Pages Posted: 5 Aug 2015
Date Written: August 3, 2015
Abstract
According to the famous "Coase Theorem", market forces, under given conditions, will automatically, without any external intervention, bring about an efficient allocation of resources. These conditions, necessary for the smooth operation of the "invisible hand" which leads to efficiency, are denoted as "absence of transaction costs", as the presence of transaction costs may impede this desired process. The main legal implication outlined by Coase is that absent transaction cost, there is no need, and no place, from an efficiency point of view, for liability rules: resource allocation would be the same either with or without them. An act which is efficient will be carried out despite a liability rule which imposes the burden of compensation on the actor. On the other hand, an inefficient act will be barred by market forces without the help of liability rules. What exactly are these transaction costs whose absence triggers the "Coase Theorem"? Neither Coase, nor anyone else, as far as we know, has ever pretended to define this notion exhaustively and accurately. However, some examples were provided including costs of negotiations, lack of information, etc.
Keywords: Coase, Torts, product liability, liability rules, transaction costs
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