Suppose that your neighbor smokes in his yard. You can smell his cigarette smoke from inside your house, and you dislike the smell. Which of the following statements is correct?
A)If it is difficult for you and your neighbor to negotiate with each other, then you may not be able to arrive at an efficient solution to this problem.
B)Since your neighbor has the legal right to smoke in his yard, you will not be able to arrive at an efficient solution to this problem.
C)It not socially optimal for your neighbor to smoke in his yard.
D)There is no efficient solution to this problem.

Question

Quizplus · Accepted Answer

The Coase theorem states that if at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities. Thus, if it is difficult for you and your neighbor to negotiate, then you may not be able to arrive at an efficient solution.

Suppose That Your Neighbor Smokes in His Yard