Question

The Coase theorem applies when transactions costs are

A) low and property rights exist.
B) low and property rights do not exist.
C) high and property rights exist.
D) high and property rights do not exist.
E) low and there are no externalities.

Answer 1

The Coase theorem applies when transactions costs are low and property rights exist. Clear and well-defined property rights are crucial in addressing externalities and determining who bears the costs.

Step-by-step explanation:

The Coase theorem applies when transactions costs are low and property rights exist. According to Ronald Coase, clear and well-defined property rights are crucial in addressing externalities, such as the example of a farmer's field being set ablaze by sparks from a nearby railroad track. When property rights are clearly assigned, either the farmer or the railroad will take responsibility and seek the least costly method to reduce the risk of sparks. The property right determines who pays the costs.