Logically Explain
Explain COASE theorem working with the help of real-life example?
Coase theorem is a model that suggests a trade in externalities via bargaining between economic agents as an economically efficient way to secure Pareto-optimality in the presence of externalities. It states that if property rights are well defined and transaction costs are low, bargaining will lead to a socially efficient outcome regardless of the initial allocation of property.
An externality refers to a cost or benefit that arises to a third party due to an economic activity or transaction between two parties. The presence of externalities deviates the market from a Pareto-efficient outcome as the private equilibrium of consumption or production of the good or service, which is generating the externality, fails to reflect the true cost or benefit of the activity to the society.
Coase theorem proposes bargaining to be more viable than legal measures as the party(s) which is profited from the externality will have the incentive to pay the affected party(s) to preclude the latter from interfering in the former's activity.
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