The Coase theorem tells us that in the presence of external costs in production,
A)the government must intervene in the market to assure that the efficient level of output is produced.
B)private parties can negotiate to produce the good at a level where marginal willingness to pay for the good by consumers is zero.
C)private parties can never arrive at the efficient solution.
D)then under certain conditions, private parties can arrive at the efficient solution without government involvement.
E)and if transactions costs are high, then only the private sector will be able to produce the efficient amount of the good.

Question

Quizplus · Accepted Answer

The Coase theorem states that under certain conditions, private parties can arrive at the efficient solution without government involvement. These conditions include low transaction costs, defined as the costs necessary to reach an agreement between private parties. When transaction costs are low, private parties can negotiate to produce the good at a level where marginal social cost equals marginal social benefit. Therefore, choice D is the correct answer.

The Coase Theorem Tells Us That in the Presence of External