Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain, then, according to the Coase theorem,
A) an equitable solution can be reached only if property rights are assigned to the victims of pollution and not the polluters.
B) an equitable solution can be reached only if property rights are assigned to polluters and not to the victims of pollution.
C) an efficient solution can be reached regardless of the initial assignment of property rights.
D) government intervention is necessary to reach an efficient and equitable solution.

Question

Quizplus · Accepted Answer

The Coase theorem states that in the presence of low transaction costs and willing parties, an efficient solution can be reached regardless of the initial assignment of property rights. This means that if the parties are able to bargain, they can come to an agreement that benefits both of them and eliminates the negative externality. Therefore, government intervention is not necessary and the assignment of property rights does not matter as long as the parties are willing to negotiate.

Suppose a Negative Externality Exists in a Market