Question

The Coase theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, then they:

Answer 1

The Coase theorem states that private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, allowing them to achieve an efficient outcome without government intervention.

Step-by-step explanation:

The Coase theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, then they can achieve an efficient outcome regardless of the initial allocation of property rights. This means that if the farmer and the railroad can come to an agreement on how to handle the issue of sparks causing the field to catch fire, they can avoid the need for government intervention.

For example, the farmer and the railroad could negotiate a deal where the farmer is compensated for any damage caused by the sparks, which would incentivize the railroad to take measures to reduce the sparks. Alternatively, the farmer could agree to build a fence and the railroad could agree to pay for it.

The Coase theorem highlights the importance of well-defined property rights and the ability of private parties to negotiate in order to address externalities in an efficient and mutually beneficial way.