Which of the following statements is true?
A)The lower transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange.
B)The higher transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange.
C)Coase agrees with Pigou that taxing those activities associated with negative externalities is a good idea.
D)Coase agrees with Pigou that taxing those activities associated with positive externalities is a good idea.

Question

Quizplus · Accepted Answer

Lower transaction costs make it easier and cheaper for individuals to negotiate and come to a voluntary agreement to address negative externalities. Coase's theorem asserts that if transaction costs are low, private bargaining between the parties involved will internalize the externality, regardless of who is assigned property rights. Therefore, A is the correct choice. B is incorrect; higher transaction costs mean that individuals are less likely to solve negative externality problems through a voluntary exchange. C and D are both incorrect; Coase asserts that private bargaining, not taxing, is the best way to address externalities.

Which of the Following Statements Is True