ECONOMICS
COST BENEFIT ANALYSIS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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always
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without transaction costs
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with transaction costs under 1mio.$
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never
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Detailed explanation-1: -The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property.
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: -Coase Theorem Meaning The Coase theorem suggests that problems related to externalities can be solved without any government intervention if both parties are willing to bargain in a market with perfect competition conditions, irrelevant to their rights at the beginning.
Detailed explanation-4: -This is the famous Coase Theorem – if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. Dan Usher (1998) famously argued that this is “either tautological, incoherent, or wrong”.