For an efficient equilibrium, the Coase theorem does NOT require that:
A) transaction costs are low.
B) the government sets a Pigouvian tax equal to the external cost.
C) property rights are clearly defined.
D) private bargains are possible.

Question

Quizplus · Accepted Answer

The Coase theorem suggests that in the absence of transaction costs, private bargaining between the parties involved can reach an efficient equilibrium regardless of how property rights are assigned. However, the theorem does not require that the government sets a Pigouvian tax equal to the external cost. In fact, the idea of a Pigouvian tax implies that the government intervenes with a corrective tax to internalize the external cost, which goes against the principle of private bargaining under the Coase theorem.

For an Efficient Equilibrium, the Coase Theorem Does NOT Require