A practical example of the Coase Theorem

The Coase Theorem is the idea that a legal system would be unnecessary for the regulation of externalities in a world without transaction costs. A classic example is a train line that produces sparks that set off fires and destroy farmers' crops. If the damage to the farmer is worth more than the economic benefits to the train company the farmers will pay the train company not to run their trains. A rather odd example, from the very early days of this blog, is my consumption of Subway sandwiches.

Sweden has provided another example, via The Croydonian:

"A municipality in eastern Sweden paid a biker gang 200,000 kronor to move away from the region."

The national government could have intervened and used state power to get rid of the biker gang but it wasn't necessary. The socially optimal (presuming that the municipalities leaders are properly representing their constituents) solution won out without outside legal intervention. The bikers didn't want to stay more than the locals wanted them gone. The locals made it worth their while to leave.