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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The Coase theorem does NOT apply if

a. there is a significant externality between two parties.

b. the court system vigorously enforces all contracts.

c. transaction costs make negotiating difficult.

d. both parties understand the externality fully.

To determine
Relevance of externality.

Explanation

Option (c):

The Coase theorem states that the proportion that the private parties can bargain without cost over the resources’ allocation can solve the problems in their own way.  Sometimes, the interested parties or private parties fail to solve the problem of externality. This is because of the problem of transaction cost. The Coase theorem is not applicable if transaction costs make negotiating difficult.  Thus, option “c” is correct.

Option (a):

The Coase theorem is applicable if there is a significant externality between two parties. In the Coase theorem, the proportion that the private parties can bargain without cost over the resources’ allocation can solve the problems in their own way...

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