Question

Which of the following situation would make transaction costs too high to negotiate and therefore the Coase Theorem would not apply?
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:

d. Many firms are working together to eliminate pollution

Explanation:

Coase theorem is a private solution for the two parties who agree to reduce externalities, i.e., pollution. They negotiate in such a manner that the costs are low as one party takes over other party's polluted assets to reduce pollution. When there are more parties or firms involved to eliminate pollution, it will pose high transaction costs. Therefore, the Coase theorem will not work in that case. So, the option "D" is the correct choice.