According to the Coase theorem, private parties can solve the problem of externalities if
A) there are no transaction costs.
B) each affected party has equal power in the negotiations.
C) the party affected by the externality has the initial property right to be left alone.
D) there are a large number of affected parties.
E) the government requires them to negotiate with each other.

Question

Quizplus · Accepted Answer

The Coase theorem states that private parties can solve the problem of externalities if there are no transaction costs. This means that if parties can negotiate without incurring additional costs, they will be able to come to an efficient solution that maximizes the total value of resources. The other choices are not necessarily true for the Coase theorem to hold.

According to the Coase Theorem, Private Parties Can Solve the Problem