The Coase theorem will apply only when
A)an individual who is not affected by the externality can negotiate a settlement between the parties imposing the externality and the parties that are harmed by the externality.
B)transactions cost are low.
C)the market is perfectly competitive.
D)the courts can be used to determine the amount of compensation that must be made to the damaged party.
E)the amount of compensation that must be made to the damaged party is small.

Question

Quizplus · Accepted Answer

The Coase theorem states that in the absence of transaction costs, private bargaining will result in an efficient allocation of resources no matter who is assigned the property rights. Therefore, in order for the Coase theorem to apply, transaction costs must be low. The other choices do not necessarily determine whether the Coase theorem will apply or not.

The Coase Theorem Will Apply Only When