Chapter 16, Problem cWYWL

To determine

Coase Theorem

Concept Introduction:

Externality in Economics:

In economics, externality is a concept which discusses the consequence of an economic activity which can have a positive or a negative impact on the third party who is completely unrelated to the activity.

Socially optimal level of output:

The level of output at which marginal social benefit is exactly equal to marginal social cost is known as socially optimal level of output. If output is at some other point, market failure exists. It is also known as the allocative efficient level of output.

Transaction cost:

The cost related with trade of goods or services and involved in beating imperfections of the market. The various types of transaction costs can be broker’s commission, lawyer’s fees, informational cost of finding the price, communication charges, quality, and durability, etc, and may also sometime include transportation costs.