Question

True, False, or Uncertain.

Acid rain was the topical pollution concern during the 1990s. It was caused by pollutants released into the air (cars, industry, etc). The Coase Theorem is applicable in this case as bargaining can lead to the socially optimal outcome, namely no acid rain.

Answer 1

Coase Theorem: when there are conflicting property right, bargaining between the parties involved will lead to an efficient outcome regardless of which party is ultimately awarded the property rights, as long as the transaction costs associated with bargaining are negligible.

In this case, those who emit acids (polluting industries) and common people (who face negative externality) can enter into a contract, given that no transaction cost is involved. But, that outcome would not lead to no acid rain, i.e. there would be some social optimal level of acid rain, if utility curves are convex. But, if acid rain and compensation/ money are perfect substitutes for both firms and common people, then socially optimum outcome can result in no acid rain. Both cases are shown below:

If property rights are with the common people, i.e. right to clean atmosphere, then possible outcome of acid rain and compensation is:

So, the proposition is uncertain.