Question

The Coase theorem states that

A) patents and copyrights will solve the problem of external costs.
B) taxes will solve the problem of external costs.
C) global warming is hard to solve due to the prisoners' dilemma aspect of the problem.
D) property rights are social arrangements governing ownership, use and disposal of factors of
production and goods and services.
E) if property rights are established, and if only a small number of parties are involved, and if
transactions costs are low, then private transactions are efficient.

Answer 1

The Coase Theorem, posited by Ronald Coase, states that clearly defined and enforceable property rights can lead to an efficient resolution of externalities between parties without government intervention.

Step-by-step explanation:

The Coase Theorem is a fundamental principle in environmental economics and law, asserting that under certain conditions, private parties can efficiently solve the problem of externalities on their own. In the example given by Nobel laureate Ronald Coase, a farmer and a railroad company both have potential property rights: the farmer's right not to have his field burned and the railroad's right to operate trains. Coase theorized that if property rights are clearly defined and transaction costs are low, the responsible party will find the least costly way to reduce the risk, whether it's the railroad installing a device to prevent sparks or the farmer building a fence.

In the scenario where a locomotive emits sparks that set a field ablaze, the establishment of better-defined property rights would guide who should bear the cost of preventing such an externality. If the farmer has the property right not to have the field burned, the railroad would have to pay to reduce the sparks, and vice versa. This is the core idea of Coase Theorem, which suggests that the allocation of property rights, as long as they are clearly defined and enforceable, is essential to resolving externalities between parties efficiently, without the need for government intervention. The theorem makes a less conventional but profound argument relative to external costs: When rights are well-defined and transaction costs are low, the market can internally resolve the issue of externality.