According to the Coase theorem, private parties can solve the problem of externalities if
A)the cost of bargaining is small.
B)the initial distribution of legal rights favors the person being adversely affected by the externality.
C)the number of parties involved is sufficiently large.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

According to the Coase theorem, if transaction costs are low, private parties can negotiate and solve the problem of externalities irrespective of the initial distribution of legal rights. Therefore, option B is not correct. Option C is also incorrect because the theorem assumes that the number of parties is limited. Thus, option A is the correct choice.

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