Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?
A)One neighbor doesn't mow his lawn.
B)One neighbor doesn't paint her house.
C)One neighbor comes home on his noisy motorcycle late at night.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The Coase theorem predicts that with small transaction costs, private parties can negotiate and arrive at an efficient solution to any problem regardless of its nature. Therefore, all of the given problems can be resolved by private agreements if transaction costs are low. For instance, in problem A, the neighbor who gets irritated by the long grass can offer to pay the lazy neighbor to mow his lawn, or they can negotiate a time schedule when the mowing can be carried out. In problem C, the neighbor with the motorcycle can be offered some compensation to park his bike elsewhere or to ride at a different time. As long as there are no significant transaction costs associated with negotiating these agreements, the Coase theorem predicts that efficient solutions can be reached privately.

Assuming Transaction Costs Are Small, the Coase Theorem Would Predict