The Coase Theorem is probably the most important concept in law and economics. It is named after a great economist named Ronald Coase. And he didn't name it the Coase Theorem. It was subsequently named the Coase Theorem in his honor. He was a economist who went to the University of Virginia and then later the University of Chicago and then many years later won the Nobel Prize for the field of the study of law and economics. And what Coase says is that in this world, parties can bargain and essentially strike side deals as to,in its simplest form, as to what they get to do. So let me give a very simple example. I enjoy, on a weekend afternoon every once in a while, sitting on my back porch and smoking a cigar. Sometimes my neighbors like to come outdoors, and enjoy their backyard and they think that my cigar smells bad. Question is: do I have the responsibility to snuff out my cigar, or smoke it indoors, or do they have the responsibility to move indoors to avoid my cigar smoke. And you might say, well, it's my responsibility not to impose on them. Well, let's change the example a little bit. What if I'm sitting outside minding my own business and they want to mow their lawn? Do I have veto power over whether they get to mow their lawn or not? The point here is that my cigar smoking doesn't bother anybody if they aren't home. And their lawn mowing noise doesn't bother me unless I'm sitting out on my back porch as well. So Coase's great insight was the harm there comes from the fact that both of us want to use the air at the same time for different incompatible purposes. I want to use the air to smoke, they want to use the air to make noise when they mow their lawn. And so this is where law comes in. And what Coase says is we have to recognize that it's the combination of both parties that causes the harm, that, as we say, “it takes two to tort.” A tort arises only because of the fact that both of us are there at the same time, which is the case with just about everything. There's examples we could think about that are very common examples from history that also illustrate the Coase theorem. So, a classic example, and one Coase uses in his article, his famous article, The Problem of Social Cost, is a railway line that goes through a field of wheat. And here's how it works, which is the railroad goes along. Periodically, though, the locomotive on the tracks sends out sparks and the sparks start a fire. And so the question is, is the railroad responsible for the train sparks? If the grain was further from the tracks, there would be no fire. Or if the train put spark arresters on the locomotive, there would also be no fire. And so the question is, does this train hold the responsibility, or does the grain farmer hold the responsibility to avoid the fire? And what Coase's great insight is, is if these parties could bargain, what they would agree is that if it was cheaper for the farmer to set his grain further back from the railroad, then the Farmer would do that. And if the responsibility was on the train owner, then the train owner could compensate them to do that, if that costs less than attaching the spark arrestor. And so what Coase's great insight was, in thinking about who should have the responsibility to avoid these accidents, we should try to replicate what the parties would actually do in practice, because that will minimize the total social cost of preventing accidents and thereby maximize overall social wealth.