THE COASE THEOREM. Kids, this article by Josh Barro gives a good statement of the Coase Theorem, “which holds that the problem of externalities â€” that is, me taking an action that imposes a cost on you â€” can be fixed without government action so long as property rights are clearly defined and transaction costs are low.” In the Dilbert example, the friend is imposing costs on Dilbert’s coworker by “bugging” her to come visit. The property rights are clearly defined and the transaction costs are very low (the cost of a phone call or an e mail). So a compromise can be negotiated.
Barro gives another example: the problem of airline seats, where the passenger in front wants to recline his seat. Barro discusses the possible solution of your paying the passenger in front not to recline.
Another example of a Coase Theorem application is that of a factory emitting an unpleasant smell. The factory can buy the homes of the neighbors or the neighbors can pay the factory to stop emitting.