Question

When there are no transaction costs, but in the presence of externalities (e.g., pollution), under what circumstances is the equilibrium allocation of physical resources, including the equilibrium level of externalities, independent of the assignment of rights and liabilities to different agents? Under what circumstances will an efficient equilibrium allocation necessarily result? What is the role for law, if any, in improving the outcome of private negotiations between private parties engaged in activities that have external effects

Answer 1

When there are no transaction costs, but in the presence of externalities (e.g., pollution), bargaining between parties will lead to circumstances is the equilibrium allocation of physical resources, including the equilibrium level of externalities, independent of the assignment of rights and liabilities to different agents. the statemet talks about coases theorem of dealing with externalities. if property rights are well defined, no matter with whome it is and transaction costs are zero, then both parties can reach to an equilibrium bargaining with each other, in the presence of externality.

an efficient equilibrium will result if both the parties are ready to negotiate and the transaction cost is zero. and also the most inportant thing is the property rghts. here the government has a role to play. the laws will well define the property rights which will help with negotiation, no matter with whome it innitial is with.