-Keeping in mind the Coase theorem, in the figure above, if the residents of the town 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 residents of the town 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

According to the Coase theorem, if property rights are well-defined and transaction costs are low, parties will negotiate to reach an efficient outcome regardless of who owns the rights. If the residents own the lake, they can negotiate with the pesticide producers to reach the efficient level of production.

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