Law and economics are two fields of study that are influenced by one another. One of the main ideas that has helped in the economic analysis of law was developed by Ronald Coase. The Coase Theorem states that: "If trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.” This paper will show if the Coase Theorem applies to this case and if its validity is contained.
Before introducing the case, a more in-depth analysis of the Coase theorem is needed. According to Coase two conditions are necessary in the presence of an externality for the theorem to hold; no transaction costs and efficient outcome. Let us consider the scenario…show more content… The institute, through a mixture of mechanical and productive measures, made it possible to reduce the loss of sediment but also help prevent the erosion. The productive measures could be undertaken only in one way, through stopping the grazing activity. This resulted to be a major source of conflict because for the majority of the farmers, the gazing activity was their main source of income. Despite that they managed to reach an agreement. Two earthen dams were built to provide water to the farmers in order to compensate their loss from the gazing activity. Even though this looked like the perfect solution, unfortunately, the fields were at a height lower than the earthen dams, which caused them to harness the water. This situation required an intermediary. That is why in 1980, The Water Users Association was created. This intermediary’s goal was the management of the mechanism. The Water Users Association made possible the distribution of tradable equal rights to the families over water areas. Therefore, each individual could use the desirable amount of water, meaning that the ones that did not fully use the area could sell water coupon to the ones that needed them…show more content… Private benefits include: higher income and a better standard of living, increased output, improvement in the productivity of the farmers, and also an increase in common property resources. The external benefits include: a greater return on production, a decrease in erosion and an increase in the number common property resources.
Having in mind that the State had intervened before and had not solved the problem, the solution offered by the Water Users Association facilitated the whole process and made possible the distribution of the rights. From an economic point of view, the equal distribution of rights is random. By random, I mean that it is just as arbitrary as any other distribution of rights. However, the solution implemented was efficient because the water coupons were used by the farmers who were more in need of the water supply.
Coase would put a statement formulated in this way: Because transaction costs were very low (approaching zero), an efficient solution could take place through a cooperative