Question

Why is the Coase theorem often inapplicable to real world situations?

A) Trades in externalities are impossible
B) Bargaining outcomes are usually inefficient
C) The government usually intervenes
D) Transaction costs are rarely low

Answer 1

The correct answer is letter "D": Transaction costs are rarely low.

Step-by-step explanation:

Named after British economist Ronald Coase (1910-2013) the Coase Theorem is a legal and economic principle that states that when there are open markets and no transaction costs transactions will lead to an efficient and beneficial to all parties' results, regardless of how property rights are divided.

Transaction costs are the expenses incurred in coming to a beneficial agreement with another party. Transaction costs are hardly ever low to consider reasonable bargaining can take place since the interest of one party will most of the time be higher than the other. To agree, both parties will have to give up a big part of their demands.

Thus, the rarely low transaction costs make the Coase Theorem unfeasible.

Answer 2

Answer B) Bargaining outcomes are usually inefficient

Explanation: This is because private parties often fail to resolve the problem of externalities on their own.