how does coase theorem work? any example.?

Question

any payment involved when a property is allocated??

Answer 1

Let's suppose that you and I are neighbors. You raise rabbits. Very cute, but sometimes they get out and hop over to my vegetable garden, and do some major damage.

There are two possible public policy solutions to this situation.

First, the local government could make a law that says all rabbits must be penned up and owners are responsible for any damage if they get out. This puts the onus on you, and gives me the right to rabbit-free vegetables.

Second, the local government can say that rabbits are allowed to roam free, as they were meant to by nature. This puts the onus on me, to either build a rabbit-proof fence around my garden, to pay you to keep your rabbits locked up, or something like that.

Hope that helps.

Answer 2

several examples are given at http://faculty.econ.northwestern.edu/faculty/witte/pf/handouts/coase.html
The assignment of property rights is arbitrary, Th objective is to obtain an efficient outcome, not fairness so no payment is needed.