Question

True or False:

The Coase theorem says that in the case of externalities, allocating property rights of the externality always makes consumers and producers better off.

Answer 1

True

Externalities are the positive or negative economic impact of production or consumption of a good on the third party , who may not be involved to produce or consume the good. Externality may be positive or negative.

The Coase theorem suggests that the best solution to solve an externality is not to try to put the externality out, but to provide property rights or make bargaining possible so that the affected parties will get an economically efficient solution.Coase theorem says that efficient economic solution should take place without taking into consideration who is responsible for the externality.

For eg-Coase gave eg of a baker and a doctor who work in the same building and the noise of the baker's machine disturbs the doctor's treatment of patients . The reasoning may be that the baker should compensate the doctor but that is not the solution . The Coase theorem says that if property rights are complete as in the eg the baker's right to sound,and if the doctor and the baker can negotiate without any cost being involved,then the externality can be solved.