Question

Which of the following situation would make transaction costs too high to negotiate and therefore the Coase Theorem would not apply? Print Multiple Choice
a.Only a few people are bothered by the pollution in the area
b.Orte Tirm is the cause of the poltution
c.Many people are bothered by pollution in the area
d.Many firms are working together to eliminate pollution

Answer 1

Answer: The correct answer is "c. Many people are bothered by pollution in the area".

Explanation: The Coase Theorem points out that if property rights are well defined and transaction costs are zero, the negotiation between the parties will lead us to an optimal point of allocation in the market.

Whoever keeps the right will depend on the value of what each party produces and the costs of losing the right to property.

However, Coase's theorem ceases to be valid when there are high negotiation costs, for example between a company and thousands of inhabitants of an area (like in this case) or when property rights are not well defined (all parties believe they have the right to do what they want).