WHAT IS THE COASE THEOREM

The Cease Theorem is interpreted as asserting that the equilibrium level of an externally (e.g., pollution) is independent of institutional factors (in particular, assignment of liability for damage), except in the presence of transaction costs. It is shown here that absence of income effects (due to parallel preferences or quasi-linear utility functions) is not only sufficient (which is well known) but also necessary for this to be true. Equilibrium may be perfectly competitive or other Pareto optimal and individually rational, in particular an element of the core. Both convex and non-convex (Starrett type) economies are considered.