Question

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

a. Only a few people are bothered by the pollution in the area
b. Orte Tirm is the cause of the poltution
c. Many people are bothered by pollution in the area
d. Many firms are working together to eliminate pollution

Answer 1

The Coase Theorem would not apply in situation d. Many firms are working together to eliminate pollution because it would result in high transaction costs.

Step-by-step explanation:

The correct answer is d. Many firms are working together to eliminate pollution.

The Coase Theorem states that if transaction costs are low and property rights are well-defined, then parties will negotiate and internalize externalities in order to reach an efficient outcome. However, if transaction costs are too high, it becomes difficult for parties to negotiate and reach an agreement.

In option d, many firms working together to eliminate pollution may lead to high transaction costs. Coordinating the efforts of multiple firms can be challenging and time-consuming, resulting in higher costs associated with negotiation.

Answer 2

d. Many firms are working together to eliminate pollution

Step-by-step explanation:

Coase theorem is a private solution for the two parties who agree to reduce externalities, i.e., pollution. They negotiate in such a manner that the costs are low as one party takes over other party's polluted assets to reduce pollution. When there are more parties or firms involved to eliminate pollution, it will pose high transaction costs. Therefore, the Coase theorem will not work in that case. So, the option "D" is the correct choice.