The Coase's Theorem Revisiting with Positive Transaction Costs; An Approach to Investigating the Role of Government in Facilitating the Market Exchange

The Coase theorem is significantly prominent in responding to the externality problem, which has been criticized and defended through history. This study addresses zero transaction costs, one of the most significant criticisms of the Coase theorem. Acceptance of zero transaction costs has two misleading consequences. First, that market exchange is not possible once the transaction costs are positive. Second, the government's role is relegated to determining property rights. According to our modified version of the Coase Theorem with positive transaction costs, markets are exchanged when the expected return exceeds the expected costs. Technological progress and institutional innovation are two ways that government can influence market agreements, but their effect on pollution emissions and efficiency is different. Pollution is reduced if the polluter owns property rights, but efficacy cannot be judged. When the pollutant has the property rights, changes in pollution emissions and efficiency depend on the share of reduction costs and transaction costs resulting from technological progress and improvement of institutional quality. In addition, a criterion to determine property rights could be proposed. If all economic entities have the same share of technological progress and improvement of institutional quality, by granting property rights to polluters, efficiency always increases and pollution emissions decrease.