ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -According to the Coase theorem, in the face of market inefficiencies resulting from externalities, private citizens (or firms) are able to negotiate a mutually beneficial, socially desirable solution as long as there are no costs associated with the negotiation process.

Detailed explanation-2: -! The Coase theorem implies that the market will solve externalities all by itself unless: (1) property rights are incomplete (for example, no one owns the air) or (2) negotiating is costly (for example, the entire population owns the air, but all citizens cannot simultaneously negotiate about pollution levels). !

Detailed explanation-3: -The Coase Theorem implies that there are no externalities. FALSE. The Coase Theorem says that, if certain conditions are satisfied, externalities do not prevent a market from reaching a socially optimal outcome. It does not argue against the existence of externalities.

Detailed explanation-4: -The Coase Theorem states that under ideal economic conditions, where there is a conflict of property rights, the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue, resulting in the most efficient outcome.

Detailed explanation-5: -By applying the Coase Theorem two possible solutions arise for internalizing this externality. These solutions can occur because the positive external benefits are clearly identified and we assume that 1) transaction costs are low; 2) property rights are clearly defined.