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To illustrate the Coase theorem, consider a common scenario involving a paper mill discharging pollutants into a river, which leads to harmful effects for local wildlife, including fish. The fishermen who depend on these fish for their livelihood are impacted, as are families relying on the river for recreational purposes or drinking water. Coase posits that if property rights were to be assigned—say, to a park authority overseeing the river—the rights to pollute might be traded in ways that could lead to a more efficient outcome.
Assigning Property Rights
The assignment of property rights can occur in two ways: