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Which of the following options is correct? According to the Coase theorem a
Which of the following options is correct?
According to the Coase theorem
a. Government intervention is necessary to solve an externality problem.
b. Under certain conditions, the private market will solve externality problems.
c. The private market will usually solve externality problems, except when side payments are necessary.
d. An externality is a form of market failure.
e. Negative externalities are less efficient than positive externalities.
Expert Solution
The answer to this question is:
b. Under certain conditions, the private market will solve externality problems.
Through bargaining, the private market will address the issues of externality if certain conditions exist. Some of these conditions include the existence of property rights and that the transaction costs must be low enough. Therefore, if transaction expenses are exceedingly high and property rights do not exist, then the private market will not address an externality problem.
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