Economics • Economic BasicsMedium
What does the 'Coase Theorem' proposition primarily assert in the presence of externalities?
A. Government intervention is always required to correct market failures.
B. Private parties can bargain among themselves to achieve an efficient allocation of resources, regardless of initial property rights, provided transaction costs are zero.✓ Correct Answer
C. Taxes are the only efficient way to eliminate negative externalities.
D. Monopolies automatically internalize all social costs.
💡 Solution & Explanation
The Coase Theorem posits that private economic actors can bargain to internalize externalities and achieve resource efficiency without government intervention if transaction costs are zero and property rights are clear. Other options wrongly assert that state intervention or taxes are mandatory for resolving market externalities. The theorem highlights the power of voluntary market contracts. A related economic concept is market failure caused by negative externalities such as industrial pollution.
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