In which of the following cases is the Coase theorem most likely to solve the externality?
A)Ed is allergic to his roommate's cat.
B)Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada.
C)Polluted water runoff from farms is making residents of a nearby town sick.
D)Industrialization around the world is causing global warming.

Question

Quizplus · Accepted Answer

The Coase theorem is most applicable in situations where there are low transaction costs and parties can negotiate directly. In the case of Ed being allergic to his roommate's cat, the parties involved are few and can easily negotiate a solution, making it the most likely scenario where the Coase theorem could solve the externality.

In Which of the Following Cases Is the Coase Theorem