According to the Coase theorem, private parties can solve the problem of externalities if ?
Correct answer: A. there are no transaction costs.
- A. there are no transaction costs.
- B. each affected party has equal power in the negotiations.
- C. the party affected by the externality has the initial property right to be left alone.
- D. There are a large number of affected parties.
- E. the government requires them to negotiate with each other
Explanation
The Coase theorem requires negligible or zero transaction costs so that affected parties can bargain toward an efficient outcome. The initial allocation of rights affects who pays, but not the efficient outcome under these conditions.
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