The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called
A)the Pigovian theorem.
B)a corrective tax.
C)the externality theorem.
D)the Coase theorem.

Question

Quizplus · Accepted Answer

The Coase theorem states that if private parties can bargain without cost, they can always reach a mutually beneficial solution to externalities, regardless of the initial allocation of property rights. This means that the market can effectively allocate resources without government intervention, in contrast to the Pigovian theorem which recommends corrective taxes to internalize externalities. Therefore, the correct answer is D.

The Proposition That If Private Parties Can Bargain Without Cost