Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table:

$\begin{array}{|l|r|r|}
\text { \# of cell phone calls}&\text { Marginal
Costs to Peter} &\text { Marginal
Benefits to
John}\
\hline 0 & \$ 0 & \$ 0 \
\hline 1 & \$ 2 & \$ 10 \
\hline 2 & \$ 6 & \$ 8 \
\hline 3 & \$ 10 & \$ 6 \
\hline
\end{array}$ According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another
A)an efficient outcome results if the liability is placed on the party with the lowest cost of prevention.
B)an efficient outcome results no matter how the law assigns responsibility.
C)efficiency cannot be reached without government intervention.
D)the correct way to deal with an externality is to tax it.

Question

Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table:

$\begin{array}{|l|r|r|}
\text { \# of cell phone calls}&\text { Marginal
Costs to Peter}  &\text { Marginal
Benefits to
John}\
\hline 0 & \$ 0 & \$ 0 \
\hline 1 & \$ 2 & \$ 10 \
\hline 2 & \$ 6 & \$ 8 \
\hline 3 & \$ 10 & \$ 6 \
\hline
\end{array}$ According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another
A)an efficient outcome results if the liability is placed on the party with the lowest cost of prevention.
B)an efficient outcome results no matter how the law assigns responsibility.
C)efficiency cannot be reached without government intervention.
D)the correct way to deal with an externality is to tax it.

Quizplus · Accepted Answer

According to the Coase theorem, in the absence of transaction costs, an efficient outcome can be achieved through bargaining, regardless of how the law assigns responsibility. Therefore, it does not matter whether the liability is placed on Peter or John, as long as they can negotiate and reach an agreement that maximizes the total surplus. The other options, A, C, and D, are not applicable to the Coase theorem.

Peter Studies at the Coffee Shop Around the Corner, at the Same