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The Coase theorem states that in the presence of externalities, a market economy will: a
The Coase theorem states that in the presence of externalities, a market economy will:
a. reach an efficient solution only in the case of government regulation.
b. always reach an efficient solution.
c. never reach an efficient solution.
d. reach an efficient solution if transaction costs are sufficiently low and property rights are well-defined.
Expert Solution
The correct answer is (d). Precisely, the Coase Theorem expresses that in an externality, if the trade is conceivable with no costs of the transaction, then bargaining will result in an efficient result irrespective of the initial property rights allocation. It merely implies the market economy will be reaching an efficient result provided the transaction cost is sufficiently low and correctly defines property rights.
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