Question

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

a. Mary pays Cathy $16 so that Mary can smoke.
b. Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke.
c. Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.
d. Mary pays Cathy $14 so that Mary can smoke.

Answer 1

Answer: The following scenarios is a successful example of the Coase theorem: Mary pays Cathy $16 so that Mary can smoke.

Coase Theorem was termed by Ronald Coase which states that "if commerce in an externality irrespective of the state, is feasible and there are no transaction costs involved, then negotiation will lead to an Pareto-efficient result irrespective of the initial allotment of holding rights.”

In this particular case Cathy values smoke free air at $15, so Mary has to pay her more than $15 in order for her to smoke.