question archive According to Coase Theorem, if negotiation costs are negligible, the socially-optimal solution to the externality problem would be achieved: a
According to Coase Theorem, if negotiation costs are negligible, the socially-optimal solution to the externality problem would be achieved: a
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According to Coase Theorem, if negotiation costs are negligible, the socially-optimal solution to the externality problem would be achieved:
a. By making the party that is producing an externality liable,
b. By making the party that is producing an externality non-liable,
c. Regardless of whether the party producing an externality is made liable or not,
d. By making the party that is producing an externality liable, but only if this party has an inexpensive way of preventing the externality from happening.
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The correct answer is d. By making the party that is producing an externality liable, but only if this party has an inexpensive way of preventing the externality from happening..
This is the correct answer because the Coase theorem states that if the bargaining costs are zero, both the parties can discuss and decide a bargaining cost that is paid by the externality producing party. This is possible if both the parties have the equal bargaining and property rights. Is the externality producing party is offering an expensive solution that would lead to an increase in the social cost, then the externality producing party is liable to pay the externality cost.
