Negative Externality

The following questions refer to the accompanying diagram, which shows the effects of a negative externality created by an industry's production. The equilibrium quantity in the absence of any attempt to internalize the externality is QE, and the optimal quantity according to a Pigovian analysis is QO.

-Refer to Negative Externality.Suppose there are no transactions costs.Also suppose the externality is internalized when the damaged parties offer producers a bribe of $5 per unit to reduce their production.Coase's analysis indicates that social gain in this situation will equal
A) area A + B + F.
B) area A + B + F - E.
C) area A + B + C + D + F + G + H.
D) area A + B + C + F + G.

Question

Negative Externality

The following questions refer to the accompanying diagram, which shows the effects of a negative externality created by an industry's production. The equilibrium quantity in the absence of any attempt to internalize the externality is QE, and the optimal quantity according to a Pigovian analysis is QO.

-Refer to Negative Externality.Suppose there are no transactions costs.Also suppose the externality is internalized when the damaged parties offer producers a bribe of $5 per unit to reduce their production.Coase's analysis indicates that social gain in this situation will equal
A) area A + B + F. 
B) area A + B + F - E. 
C) area A + B + C + D + F + G + H. 
D) area A + B + C + F + G.

Quizplus · Accepted Answer

According to Coase's theorem, if there are no transaction costs and parties can negotiate freely, the allocation of resources will be efficient regardless of the initial distribution of property rights. In this case, the social gain from internalizing the externality through a bribe would include the areas representing the avoided negative externality (A + B + F), without subtracting or adding other areas, as these represent the net social gain from the reduction in production causing the externality.

Negative Externality The Following Questions Refer to the Accompanying Diagram, Which Shows