If property rights are held by the producer of an externality-generating good, then bargaining will continue as long as MEC ρ Mπ, where ρ represents the payment offered to the producer not to pollute.

Question

If property rights are held by the producer of an externality-generating good, then bargaining will continue as long as MEC > ρ > Mπ, where ρ represents the payment offered to the producer not to pollute.

Quizplus · Accepted Answer

This statement is true based on the Coase theorem, which suggests that if property rights are clearly defined and transaction costs are low, then bargaining between the parties involved will result in an efficient outcome. In this case, MEC represents the marginal external cost (the cost imposed on others by the pollution), ρ represents the payment offered to the producer not to pollute (the compensation for the cost of reducing emissions), and Mπ represents the marginal private cost (the cost incurred by the producer to reduce pollution). As long as the payment offered is higher than the private cost but lower than the external cost, both parties have an incentive to reach an agreement that benefits them both.

If Property Rights Are Held by the Producer of an Externality-Generating