According to the Coase Theorem, externality problems:
A) Do not exist in reality, because all costs and benefits are internal to firms
B) Can be solved through private negotiations without the need for government intervention
C) Must only be resolved by government action, through either taxes or subsidies
D) Can never be resolved adequately because one party always gains while the other loses

Question

Quizplus · Accepted Answer

The Coase Theorem suggests that externalities can be solved through private negotiations between parties as long as property rights are clearly defined and bargaining costs are low. This means that government intervention may not always be necessary to resolve externality problems. Option A is incorrect as externality problems do exist in reality. Option C is incorrect as government intervention is not always required. Option D is incorrect as the Coase Theorem suggests that it is possible for both parties to benefit from resolving externality problems.

According to the Coase Theorem, Externality Problems