The Coase theorem suggests that a private transaction can compensate for an externality when private property rights exist. In practice, why doesn't it work when large numbers of people are involved?
A) because marginal costs are higher than marginal benefits
B) because too many politicians get involved
C) because marginal benefits are higher than marginal costs
D) because transaction costs are too high

Question

Quizplus · Accepted Answer

When large numbers of people are involved in a transaction, transaction costs can become too high, making it difficult or impossible to negotiate and compensate for the externality. It may also be impractical or costly to define and enforce property rights in such cases, further hindering the operation of the Coase theorem. Therefore, D is the best choice.

The Coase Theorem Suggests That a Private Transaction Can Compensate