Economics • Economic BasicsMedium
What does the 'Coase Theorem' propose regarding externalities in economic transactions?
A. Government intervention is always mandatory to correct negative externalities.
B. If property rights are well-defined and transaction costs are negligible, private parties can negotiate an efficient solution regardless of the initial allocation of rights.✓ Correct Answer
C. Monopolies always generate optimal resource allocation despite external costs.
D. Taxation is the only method to achieve Pareto efficiency when public goods are present.
💡 Solution & Explanation
The Coase Theorem demonstrates that private market negotiations can achieve economic efficiency regarding externalities if property rights are clearly defined and transaction costs remain negligible. It challenges the assumption that state intervention is universally required to correct external costs.
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