-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.According to Coase's Theorem,which of the following scenarios is most likely to lead to the socially optimal level of pollution?
A) The firm owns the river and there are a thousand surrounding neighbors.
B) The firm owns the river and there is just one nearby neighbor.
C) The river is jointly owned by one thousand surrounding neighbors.
D) The firm owns the river, and therefore produces the social optimum no matter what.

Question

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.According to Coase's Theorem,which of the following scenarios is most likely to lead to the socially optimal level of pollution?
A) The firm owns the river and there are a thousand surrounding neighbors. 
B) The firm owns the river and there is just one nearby neighbor. 
C) The river is jointly owned by one thousand surrounding neighbors. 
D) The firm owns the river, and therefore produces the social optimum no matter what.

Quizplus · Accepted Answer

Coase's Theorem suggests that if transaction costs are low and property rights are clearly defined, parties will negotiate to correct externalities and reach a socially optimal outcome. With only one nearby neighbor, transaction costs (e.g., for bargaining or reaching an agreement) are likely to be lower than in a scenario with many neighbors, making it easier for the firm and the neighbor to negotiate an optimal level of pollution.

-The Above Figure Shows the Marginal Benefit to a Firm