The Coase theorem implies that the initial allocation of property rights:
A)determines all aspects of the final outcome of the negotiated agreement.
B)does not determine which person will be entitled to engage in the externality generating activity, but does determine which person will receive compensation.
C)determines which person will be entitled to engage in the externality generating activity, but does not affect which person will receive compensation.
D)must be assigned to the person with the greatest costs.

Question

Quizplus · Accepted Answer

According to the Coase theorem, if people can negotiate the purchase and sale of the right to perform activities that cause externalities, then they can always arrive at efficient solutions to the problems caused by externalities. Thus, the initial allocation of the property right does not affect whether the efficient outcome is achieved. It only determines compensation.

The Coase Theorem Implies That the Initial Allocation of Property