-Keeping in mind the Coase theorem, in the figure above, if the pesticide factories own the lake, the market does what?
A) overproduces 120 tons of pesticide
B) underproduces 120 tons of pesticide
C) overproduces 60 tons of pesticide
D) produces the efficient quantity of pesticide

Question

-Keeping in mind the Coase theorem, in the figure above, if the pesticide factories own the lake, the market does what?
A) overproduces 120 tons of pesticide 
B) underproduces 120 tons of pesticide 
C) overproduces 60 tons of pesticide 
D) produces the efficient quantity of pesticide

Quizplus · Accepted Answer

The Coase theorem states that if property rights are well-defined and transaction costs are low, the market will reach an efficient outcome regardless of the initial allocation of property rights. In this case, if the pesticide factories own the lake, they will have the incentive to reduce pollution to the point where the marginal cost of pollution equals the marginal benefit of pollution. This is the efficient quantity of pollution, and it is the same quantity that would be produced if the fishermen owned the lake.

-Keeping in Mind the Coase Theorem, in the Figure Above