A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. Initially the lake is owned by no one. Keeping in mind the Coase theorem, suppose transactions costs are low and the fishing club is given ownership of the lake. Compared to the situation with no property rights, the quantity of chemicals produced

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According to the Coase theorem, if transaction costs are low and property rights are clearly defined, parties will negotiate to correct externalities. If the fishing club owns the lake, they would negotiate with the chemical factory to reduce pollution, leading to a decrease in the quantity of chemicals produced to mitigate harm to the fish.

A Chemical Factory and a Fishing Club Share a Lake