Question

The Coase theorem postulates that private solutions to the problem of negative externalities are possible if:

A) The government imposes strict regulations
B) Property rights are well-defined
C) The market is perfectly competitive
D) Transaction costs are low

Answer 1

The Coase theorem posits that when property rights are clearly defined and transaction costs are low, private parties can efficiently negotiate to solve problems of negative externalities without government regulation.

Step-by-step explanation:

The Coase theorem suggests that private solutions to the problem of negative externalities are possible, specifically if property rights are well-defined and transaction costs are low. According to Ronald Coase, if property rights are clear and parties can negotiate without significant costs, they can arrive at mutually beneficial agreements that address the externality without government intervention. This is illustrated by Coase's example of a farmer and a railroad company, where either party may take action to prevent damage from sparks, depending on their negotiated agreement and respective property rights.