The Coase theorem reconsidered: The role of alternative activities

► We analyze the role of rents and alternative activities in the Coase theorem. ► Zero rents fail to disprove the theorem once the long run equilibrium is reached. ► Previous rejections of the theorem rely on Pareto inefficient initial allocation. ► This starting condition and not the entitlement causes the switch of activity. ► When alternative activities are correctly taken into account the theorem holds.