Question

Describe the obstacles in practice to using the Coase Theorem.

Answer 1

The obstacles in practice to using the Coase Theorem include information asymmetry, transaction costs, and collective action problems.

Step-by-step explanation:

The Coase Theorem is an economic theory that states that under certain conditions, private parties can effectively resolve externalities without government intervention. However, there are several obstacles in practice to using the Coase Theorem:

1. Information asymmetry: The economic approach to decision-making assumes that individuals have access to complete and accurate information. In reality, people often lack the necessary information to negotiate efficient solutions to externalities.
2. Transaction costs: The Coase Theorem assumes that individuals can negotiate and reach agreements at low cost. However, the process of bargaining and reaching agreements can be time-consuming, expensive, and may require legal enforcement.
3. Collective action problems: Even when there is agreement on the need for action, individuals may face difficulties in coordinating their efforts due to free-riding or disagreements on the optimal solution.