Draw a graph Briefly explaining the Coase Theorem. Suppose that the conditions for the Coase Theorem hold; that is, property rights for a resource are clearly established and bargaining costs are low. If so, what are the efficiency consequences if the government imposes a Pigouvian tax equal to the marginal external damage of production?

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A:

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.