ECONOMICS
MARKET FAILURES
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
In the presence of externalities, an economy can always reach an efficient solution as long as transaction costs are low.
|
|
|
A geometric representation of the share distribution of income among families in a given country at a given time.
|
|
|
An index between 0 and 1 derived from the Lorenz curve. 0 = income is perfectly equally distributed. 1 = income is one controlling all income.
|
|
|
None of the above
|
Detailed explanation-1: -The Coase theorem states that when transaction cost are low, two parties will be able to bargain and reach an efficient outcome in the presence of an externality. In practice, private parties often fail to resolve the problem of externalities on their own.
Detailed explanation-2: -The Coase Theorem argues that under the right conditions parties to a dispute over property rights will be able to negotiate an economically optimal solution, regardless of the initial distribution of the property rights.
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: -The so-called Coase Theorem states that markets will properly evaluate external effects regardless of the legal assignment of liability in the absence of transactions costs. However, another condition that is necessary for the operation of the theorem has been generally overlooked.
Detailed explanation-5: -This is because people generally exhibit an endowment effect, in which they value something more once they actually have possession of it. Thus, the Coase Theorem would not always work in practice because initial allocations of property rights would affect the result of the negotiations.