a) Explain the Coase theorem

a.

Coase theorem

According to Coase theorem, if transaction overheads are low enough and that property rights exist, then private markets can address externality issues through bargaining. However, if transaction expenses are too high, many parties are involved, and property rights do not exist, then the private market will not solve the problem of externality.

b.

Environmental standards: Environmental standards refer to policies enacted to address pollution of the environment. A legal limit on sulfur dioxide emissions is an example of Environmental standard.

Emissions tax: Emission tax refers to tax intended to discourage the generation of pollution from commercial and industrial processes.

Tradable emissions permit: Tradable emissions permit is a tool that permits the market to direct environment endeavors where the market does not exist naturally. Under this arrangement, the firms that generate less pollution can sale their pollution permits to other companies.

Environmental standards, emissions tax, and tradable emissions permit are policies meant to address the negative externality resulting from pollution.