The Influences of the Law on the Working of the Economic System

The lasting dispute aroused by the Coase Theorem requires a reflection on and a clarification of the functions of the law in the Theorem. The legal delimitation of rights in the Coase Theorem has dual functions: the prerequisite of market and the substitute of market. A fundamental confusion between these two functions not only leads to the wrong inference that law should interfere with the working of the market given positive transaction costs, but also overlooks the existence of delimitation costs, which makes it hard to use the theorem to explain the influences of legal delimitation of rights on efficiency.