ECO320Y5 Study Guide - Midterm Guide: Coase Theorem, Transaction Cost, Marginal Utility
Document Summary
The coase theorem applies to situations in which, whatever the legal rule, voluntary exchanges will ensure that the efficient allocation is arrived at. Transaction costs would be, for example, the cost of hiring a lawyer to go to court to sue the rancher if the rancher ignored the rule (closed range rule) requiring the. Rancher to pay the farmer damages caused by the cattle to the wheat. In a zero-transaction world, this could go to court. If the farmer had to sue the rancher, this would have to be considered transaction cost. If the transaction costs were high enough then the farmer would not go to court. The rancher would try to predict what the farmer would do in advance. The high enough costs would deter the farmer from hiring a lawyer. The transaction costs would have to be made high enough to deter the farmer from suing and go to negotiations.
