Why would someone use the Coase Theorem to minimize the impact of externalities?

Expert Solution

It can actually be mentioned that when a negative externalities in play, then the cost that is incurred to the society is greater than that of the cost that is actually borne by the customer on the whole.

In this regard, Ronald Coase with his Coase theorem actually got to give a solution for solving of the negative externality. He actually states that since externality is a problem for property rights, under perfect competition the government must establish certain well defined property rights so that the private parties actually get to negotiate for certain agreement that get to lead to the optimal allocation of resources as a result which negative externalities can be controlled all in all.

Illustration-

Consider the property rights of the air is with a chemical factory where the people around the factory who are living would actually be willing to pay for the the reduction in the pollution levels and the payment will be in such a way that it will cover of their health expenses that would be damaged due to the pollution of the factory and by doing this the factory actually gets to accept the payment and reduce its production to the socially optimal level and this is actually the desired outcome and in this way coase theorem used to solve the issue.

Rahul Sunny answered 9 months ago

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