Modelling the Coase Theorem

25 Pages Posted: 15 Aug 2012 Last revised: 5 Dec 2014

See all articles by F. E. Guerra-Pujol

F. E. Guerra-Pujol

Pontifical Catholic University of Puerto Rico; University of Central Florida

Date Written: August 14, 2012


More than fifty years ago Ronald Coase published ‘The Problem of Social Cost’. In his paper, Professor Coase presents an intriguing idea that has since become known among economists and lawyers as the ‘Coase Theorem’. Unlike most modern forms of economic analysis, however, Coase’s Theorem is based on a verbal argument and is almost always proved arithmetically. That is to say, the Coase Theorem is not really a theorem in the formal or mathematical sense of the word. Our objective in this paper, then, is to remedy this deficiency by formalizing the logic of the Coase Theorem. In summary, we combine Coase’s intuitive insights with the formal methods of game theory.

Keywords: Coase Theorem, Coasian games, farmer-rancher model, stray cattle, railway sparks, probabilistic payoffs, transaction costs

JEL Classification: B21, B31, C72, K13

Suggested Citation

Guerra-Pujol, F. E., Modelling the Coase Theorem (August 14, 2012). European Journal of Law and Economics, vol. 5, no. 2 (Autumn/Winter 2012/13), pp.139-157, Available at SSRN: or

F. E. Guerra-Pujol (Contact Author)

Pontifical Catholic University of Puerto Rico ( email )

University of Central Florida ( email )

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