Multiple Choice
It is possible to remedy a positive externality by:
7. Externalities
Private Solutions to Externalities: The Coase Theorem
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If the assumptions of the Coase theorem are satisfied, then
A
The externality problem is resolved
B
The assignment of property rights does not matter for efficiency.
C
There are no coordination and motivation problems.
D
There is no role for the government.
Verified step by step guidance1
Understand the Coase Theorem: It states that if property rights are well-defined and transaction costs are negligible, parties can negotiate to resolve externalities efficiently, regardless of who holds the initial property rights.
Identify the key assumptions of the Coase Theorem: These include clearly defined property rights, zero transaction costs, and rational actors who can negotiate without barriers.
Analyze the implications of these assumptions: With zero transaction costs and clear property rights, parties can reach an efficient outcome through negotiation, making the initial assignment of property rights irrelevant to efficiency.
Consider the role of government: Under the Coase Theorem's assumptions, there is no need for government intervention to correct externalities, as private negotiations will lead to efficient outcomes.
Evaluate the absence of coordination and motivation problems: The theorem assumes that parties can coordinate and are motivated to negotiate, thus resolving the externality problem without additional incentives or interventions.
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