The Coase Theorem implies that victims of pollution should be able to pay polluters not to pollute if the victims value a reduction in pollution more than the polluters value the production of the pollution. Which of the following does not explain why this type of payment does not work in "real life"?
A)If there are many victims, the costs to them of organizing may be quite high.
B)If there are many firms in the industry, it may be difficult for the victims to negotiate with all of the firms.
C)The victims may have trouble quantifying the value to them of reducing the pollution.
D)Bargaining costs are likely to be small in this case, so the theorem does not apply.

Question

Quizplus · Accepted Answer

The Coase Theorem relies on the assumption that bargaining costs are low, but in real life, there are often significant transaction costs associated with negotiating and enforcing agreements between parties. Therefore, the theorem may not always apply in practice. Choices A, B, and C all suggest potential reasons why transaction costs may be high, but the question asks which does not explain why payments do not work in "real life." The Coase Theorem assumes that bargaining costs are low, which is why the payment can be made. Therefore, if bargaining costs are likely to be small in this case, then the payment should be successful, and the theorem applies. This means that options A, B, and C are not correct, as they all describe potential difficulties in the negotiation process, which would increase bargaining costs and make the payment less effective.

The Coase Theorem Implies That Victims of Pollution Should Be