Question

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called: a. the Pigovian theorem. b. a corrective tax. c. the externality theorem. d. the Coase theorem.

Answer 1

Answer:

It is called d. the Coase theorem

Explanation:

"If private parties ... over externalities on their own" is the common wording of the Coase theorem.

Besides the commonly mentioned requirement that transaction cost must be zero, there are other assumptions to be satisfied including:

1. Clearly defined property rights (to bargain on)

2. No wealth effects (because the money you receive/pay for the benefits/costs will make you poorer/richer and change how valuable they are to you)