The Coase theorem suggests that private solutions to an externality problem
A)are effective under all conditions.
B)will always allocate resources efficiently if private parties can bargain without cost.
C)are only efficient when there are negative externalities.
D)may not be possible because of the distribution of property rights.

Question

Quizplus · Accepted Answer

The Coase theorem suggests that if private parties can bargain without cost and property rights are well-defined and enforced, then they will always reach an efficient solution to an externality problem, regardless of whether the externality is positive or negative. However, this assumes the absence of any transaction costs, such as negotiation costs, or information costs, which may prevent private parties from reaching a mutually beneficial agreement.

The Coase Theorem Suggests That Private Solutions to an Externality