The EPA's system of tradable allowances is a successful application of the Coase theorem.

Question

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The Coase theorem states that in the absence of transaction costs, private parties will negotiate and find an efficient solution to a problem, regardless of how property rights are initially assigned. The EPA's system of tradable allowances allows companies to buy and sell pollution permits, and the market will determine the price that balances supply and demand. This system is an example of the Coase theorem working in practice, as private parties are incentivized to negotiate and find the most efficient solution to reducing pollution.

The EPA's System of Tradable Allowances Is a Successful Application