Question

The Coase theorem tells us that in the presence of external costs in production,

A) the government must intervene in the market to assure that the efficient level of output is produced.
B) private parties can negotiate to produce the good at a level where marginal willingness to pay for the good by consumers is zero.
C) private parties can never arrive at the efficient solution.
D) then under certain conditions, private parties can arrive at the efficient solution without government involvement.
E) and if transactions costs are high, then only the private sector will be able to produce the efficient amount of the good.

Answer 1

The correct answer is D) then under certain conditions, private parties can arrive at the efficient solution without government involvement. The Coase theorem asserts that in cases with low transaction costs and well-defined property rights, externalities can be resolved through private negotiation, leading to efficient market outcomes.

Step-by-step explanation:

The Coase theorem addresses external costs in production and provides insight into the role of government intervention in markets.

According to the theorem, externalities, such as pollution, cause market failure because the market fails to account for the social costs of production.

The question asks which statement concerning the presence of external costs is accurate according to the Coase theorem.

Option D) is correct - under certain conditions, such as well-defined property rights and low transaction costs, private parties can negotiate among themselves to resolve externalities, leading to an efficient market outcome without government intervention.

This outcome can occur when the efficiency achieved through the internalization of external costs via private negotiation outweighs the potential benefits of government intervention in the market.

Conversely, high transaction costs, lack of property rights or other market imperfections may lead to an inefficient allocation of resources whereby government intervention might be warranted to correct these market failures.