Question

Assuming the Coase theorem applies, an efficient allocation of a resource will result ... A. only if the government acts to internalize externalities. B. through negotiations between the parties involved. C. only if there are no externalities. D. only if the party responsible for the externality has the property rights. E. only if the party affected by an externality has the property rights.

Answer 1

Answer:

B. through negotiations between the parties involved.

Explanation:

• correct answer is through negotiations between the parties involved because According to Coase theory, priority rights are best defined by negotiation between the parties involved and there is no transaction cost in negotiations.                            

• The Coase theory states that when transaction costs are low, both parties can negotiate and reach an effective outcome in the presence of an outsider.