Question

Which of the following situations would make transaction costs too high to negotiate and therefore the Coase theorem would not apply?

1) When there is a lack of information about the parties involved
2) When there are too many parties involved in the transaction
3) When there are legal restrictions on negotiation
4) When the transaction involves intangible assets
5) All of the above

Answer 1

There are several situations that can lead to high transaction costs, making the Coase theorem inapplicable. These include a lack of information about the parties involved, too many parties in the transaction, legal restrictions on negotiation, and transactions involving intangible assets.

Step-by-step explanation:

The Coase theorem states that in the absence of transaction costs, private parties can efficiently negotiate and reach an agreement regarding the allocation of resources. However, there are certain situations where transaction costs can be too high, making it difficult to negotiate and rendering the Coase theorem inapplicable. These situations include:

1. Lack of information about the parties involved: When there is a lack of information, parties may struggle to assess the true value of the transaction and negotiate effectively.
2. Too many parties involved in the transaction: With an increasing number of parties, the complexity of negotiations and coordination can lead to high transaction costs.
3. Legal restrictions on negotiation: If there are legal barriers that limit the ability to negotiate, transaction costs may become too high for efficient negotiation.
4. When the transaction involves intangible assets: Intangible assets such as intellectual property or goodwill may be difficult to quantify, making negotiations challenging and transaction costs high.

In summary, when any of these situations occur, transaction costs become too high to negotiate effectively, and as a result, the Coase theorem does not apply.