Economics • Economic BasicsMedium
What is the core proposition of the 'Coase Theorem' in institutional economics?
A. Government intervention is always necessary to correct negative externalities.
B. If property rights are well-defined and transaction costs are low, private parties can resolve externalities efficiently through bargaining.✓ Correct Answer
C. Monopolies always result in deadweight loss regardless of cost conditions.
D. Tariffs and quotas are superior to subsidies for promoting domestic industries.
💡 Solution & Explanation
The Coase Theorem posits that if property rights are clearly assigned and transaction costs are negligible, private negotiating parties can arrive at an efficient solution for economic externalities regardless of initial legal entitlements. Presuming that government intervention is always mandatory ignores the decentralized bargaining potential highlighted in institutional economics. Ronald Coase demonstrated that market participants can internalize spillover costs through voluntary contracts without state regulation. This theorem revolutionized modern environmental economics and law.
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