Economics • Economic BasicsHard
What does the 'Remedial principle' or 'Coase Theorem' state regarding economic externalities?
A. Governments must always tax polluters to achieve optimal output
B. Private parties can bargain efficiently to internalize externalities regardless of initial property rights, provided transaction costs are zero✓ Correct Answer
C. Externalities cannot be corrected without complete nationalization of industries
D. Externalities only exist in monopolistic market structures
💡 Solution & Explanation
The Coase Theorem asserts that private economic agents can bargain efficiently to resolve external effects without government intervention, provided transaction costs are zero and property rights are clearly assigned. This contrasts with Pigovian tax solutions that mandate state intervention to correct market failures caused by negative externalities. The theorem highlights the power of voluntary market negotiations in achieving allocative efficiency.
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