Question 1

The conditions under which the Coase theorem applies are common in cases of externality.

Accepted Answer

The answer of The conditions under which the Coase theorem...

Question 2

The Coase theorem states that private solutions can correct for the inefficiencies of externalities if transaction costs are low and property rights are clearly defined.

Accepted Answer

The Coase theorem states exactly this - that private solutions can correct for externalities if transaction costs are low and property rights are clearly defined.

Question 3

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Accepted Answer

Private actors may not have sufficient information, bargaining power or cooperation to reach an efficient solution to externalities, leading to the need for government intervention.

Question 4

Markets with external costs are inefficient, whereas markets with external benefits are efficient.

Accepted Answer

Markets with external benefits may not be fully efficient as there may be underproduction or undervaluation of a good or service that provides external benefits to third parties. However, markets with external costs are definitely inefficient as they lead to overproduction or undervaluation of a good or service that imposes external costs on third parties.

Question 5

In a competitive market, a free market approach is always best when no externalities are present.

Accepted Answer

In a competitive market, the forces of supply and demand determine prices and quantities, allowing for efficient allocation of resources. The absence of externalities, such as pollution or public goods, ensures that the market operates without intervention from the government or other external factors. Therefore, a free market approach is usually the best option in such circumstances.

Question 6

In a competitive market, a free market approach is always best when an external benefit is present.

Accepted Answer

The answer of In a competitive market, a free market...

Question 7

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

Accepted Answer

According to the Coase theorem, as long as property rights are well-defined and transaction costs are low, private parties can bargain and reach an efficient outcome without government intervention, even in the presence of externalities. Government intervention may still be necessary if property rights are not clearly defined or transaction costs are too high.

Question 8

The EPA's system of tradable allowances is a successful application of the Coase theorem.

Accepted Answer

The EPA's system of tradable allowances allows companies to buy and sell pollution allowances, creating a market where the cost of reducing pollution is minimized. This is in line with the Coase theorem, which states that when property rights are clearly defined and transaction costs are low, private agreements will lead to efficient outcomes regardless of initial allocations.

Question 9

Everyone has the same cost of pollution abatement.

Accepted Answer

The cost of pollution abatement varies depending on the industry, technology used, and the specific pollutants being addressed. Different companies or regions may have different costs associated with reducing pollution.

Question 10

Government can be used to solve externality problems that are too costly for private parties to solve.

Accepted Answer

Externalities are costs or benefits incurred by third parties who are not involved in the production or consumption of a good or service. Private parties may not have an incentive to address externalities because the costs or benefits do not directly affect them. In such cases, government intervention can be necessary to correct these market failures and provide public goods. These interventions can include taxes or subsidies to address negative or positive externalities, government provision of public goods, or regulations on activities that create externalities.

Question 11

Government intervention is necessary to correct all externalities.

Accepted Answer

While government intervention can help correct externalities, it is not always necessary or the most efficient solution. Market-based solutions, such as taxes or subsidies, and voluntary agreements among parties can also address externalities. It depends on the specific situation and circumstances.

Question 12

Command and control policies ensure economic efficiency.

Accepted Answer

Command and control policies involve specific regulations and restrictions on economic activities, which may limit economic efficiency and innovation. Other policy approaches, such as market-based incentives and voluntary compliance, may better promote economic efficiency.

Question 13

Markets are always able to find solutions to externality problems and thus maximize social surplus.

Accepted Answer

While markets can often provide an efficient solution to externality problems through the use of property rights, price incentives, and other mechanisms, there are some cases where they may not be able to effectively address externalities. For example, when transaction costs are high or property rights are unclear, it may be difficult for markets to internalize external costs or benefits. Additionally, some externalities may be difficult to measure or monetize, making it challenging to account for them in market transactions. Therefore, while markets can often promote social surplus, they are not always the most effective means of dealing with externalities.

Question 14

If there were no transaction costs and property rights were always well-defined, there would be no external costs after trade.

Accepted Answer

In the absence of transaction costs and well-defined property rights, resources can be efficiently allocated through voluntary exchange without any external costs.

Question 15

If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist.

Accepted Answer

Low transaction costs and clearly identifiable property rights facilitate the bargaining and negotiation necessary to internalize externalities and achieve an efficient market equilibrium.

Question 16

One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed.

Accepted Answer

Regulation allows the government to set specific standards for how much pollution is allowed, and then enforce those standards through penalties and fines for companies that exceed them. This can help ensure that pollution is kept under control and that companies are held accountable for their environmental impact.

Question 17

In a competitive market, a free market approach is always best when an external cost is present.

Accepted Answer

In a competitive market with external cost, the market can fail to allocate resources efficiently. In such cases, government intervention may be necessary to correct the market failure and reallocate resources efficiently.

Question 18

The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.

Accepted Answer

The answer of The Coase theorem says that if transaction...

Question 19

An example of a transaction cost for a shirt is the price you pay for a shirt.

Accepted Answer

The price you pay for a shirt is not an example of a transaction cost. Transaction costs refer to the costs of facilitating a transaction, such as the cost of finding a seller or buyer, negotiating terms, and transferring ownership. The price you pay for a shirt is the cost of the good itself.

Question 20

Conditions for the Coase theorem are typically met, and thus markets alone can solve most externality problems.

Accepted Answer

The Coase theorem requires a number of conditions to be met in order for markets to solve externality problems. These include low transaction costs, clearly defined property rights, no market power, and no significant public goods or other externalities involved. In many cases, these conditions are not met, and government intervention or other solutions may be necessary to address externalities.

Quiz 10: Externalities- When the Price Is Not Right