The distribution of surplus gained from private parties solving an externality problem on their own,as described by the Coase theorem,is dependent on:
A)where the initial rights of the parties lie.
B)who has more power to see to enforcement.
C)which party has more negotiating power or wealth.
D)None of these statements is true.

Question

Quizplus · Accepted Answer

The Coase theorem states that if transaction costs are low and property rights are clearly defined, then private parties will negotiate towards an efficient outcome regardless of who initially holds the property rights. Therefore, the distribution of surplus gained from solving an externality problem is dependent on where the initial property rights lie.

The Distribution of Surplus Gained from Private Parties Solving an Externality