||The thesis applies the Coase Theorem (Coase 1960) as interpreted by Cheung (1990) and Lai and Hung (2006), and Olson’s Group Theory (1965) to investigate the formation and destruction of racial segregation in colonial Hong Kong. The concept of racial segregation has been developed for nearly a century. Most empirical studies on racial segregation in the United States pertain to the factors affecting pattern of segregation using statistical methods like segregation indices. They seldom cover the formation of a segregated area. As regards racial segregation in Hong Kong, the only serious works done were those by Lai and Yu (2001) and Lai (2002, 2004). They conducted empirical research on the formation and destruction of discriminatory zoning and racial segregation. However, they have not extended their research to discrimination by private or voluntary organizations. Following in the footsteps of Lai and Yu (2001) and Lai (2002 and 2004), this thesis is a study on the formation of exclusionary zoning by legislation and, as an alternative, by voluntary association; and their effects on patterns of residential segregation within a Coasian-Olson framework. The objectives of the thesis are to (a) clarify the concept of racial segregation; (b) review different approaches and theories to explain racial segregation; and (c) test two hypotheses based on the Coasian-Olson framework. In order to test the hypotheses empirically, data are obtained from the Companies Registry and the Land Registry.