Saturday, April 8, 2017

That is us, the sandbox

In law and economics, the Coase theorem (pronounced /ˈkoʊs/) describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property.
We can all see the sandbox in he definition above.  I means that markets are always incomplete, but afair traded no arbitrage cahs layer will turn the initial conditions into a wiener process with a bit error correction term.

Note, the opposing view is perfect Shannon match, queue size zero, perfect time synchronization. The difference between the two is the right hand term, the standard unit of price variation is 50% larger to accommodate denomination error.  Coin denominations are dynamic setting of basket sizes, and Coase carries the 1/2 denomination of variance bound error which support price compression, otherwise known as 'bargaining' in the Coase theorem.

But, the tendency everywhere is to revert to zero mean bit error by two color decomposition, so eventually even the Coase bargains get hedged away, the initial conditions being defeated by real innovations.  That tendency is toward the Shannon lock, but we never get there, techies go innovating  because hey start hedging the time syncs.

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