Economics • Economic BasicsHard
What does the 'Coase Theorem' suggest when transaction costs are negligible and property rights are clearly assigned?
A. Free markets will lead to a socially efficient allocation of resources regardless of who holds the initial property rights.✓ Correct Answer
B. Governments must intervene directly through heavy taxation to correct any negative externalities.
C. Monopolies will always charge prices equal to marginal cost if property rights are properly protected.
D. International trade barriers are necessary to protect domestic property and intellectual assets.
💡 Solution & Explanation
The Coase Theorem demonstrates that private market negotiations can resolve externality problems efficiently when transaction costs are negligible, regardless of initial property assignments. Government regulation is deemed unnecessary in this theoretical model if bargaining proceeds without friction. This principle forms a foundational concept in modern environmental and law-and-economics literature.
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