CA Foundation · Business Economics · Public Finance
According to the Coase theorem, private bargaining can resolve an externality efficiently when:
Private bargaining can resolve an externality efficiently when property rights are well defined and transaction costs are low. Under these conditions the parties negotiate to the efficient outcome irrespective of who initially holds the right, without needing government taxes or subsidies.
- AProperty rights are well defined and transaction costs are lowCorrect
- BThe government imposes a uniform tax on all producers
- CThe externality affects a very large number of people
- DThe good involved is a pure public good
Explanation
Coase argued that if property rights are clearly assigned and bargaining costs are negligible, affected parties can negotiate to an efficient outcome whoever holds the right. With many parties or high costs, bargaining fails, so options on large numbers or taxes are not the condition.
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