The Coase Theorem and Ideal Exchanges
Daniel Lü
TL;DR
Externalities challenge social efficiency, and the paper formalizes a Coase-style result within a finite, axiomatic bargaining framework. It first shows that bilateral, costless bargaining can fail to guarantee Pareto-optimal outcomes and may depend on initial endowments. By introducing ideal, multilateral exchanges (D1–D2), the authors prove a formal Coase theorem: with well-defined property rights and no transaction costs, any initial allocation converges to a Pareto-optimal state. This provides a rigorous benchmark clarifying how the structure of bargaining—especially coalition-enabled trades—matters for achieving efficient allocations in the presence of externalities.
Abstract
This paper offers a proof of the Coase theorem by formalizing the notion of ideal exchanges.