The distribution of surplus gained when private parties solve an externality problem on their own, under the Coase theorem, is dependent on:
A)which party has more power to enforce the solution.
B)which party has more negotiating power or wealth.
C)where the initial rights of the parties lie.
D)None of these are true.

Question

Quizplus · Accepted Answer

The Coase theorem posits that if trade in an externality is possible and there are no transaction costs, parties will bargain to solve the externality problem regardless of the initial allocation of rights. Thus, the distribution of surplus depends on where the initial rights lie, as this affects the bargaining position of each party.

The Distribution of Surplus Gained When Private Parties Solve an Externality