Chapter 14R, Problem 2MCQ

To determine

The condition that contributes to the resolution of externality problems according to the Coase theorem.

Answer to Problem 2MCQ

From the available options, the correct option is the legal rights of the parties involved are clearly defined.

Explanation of Solution

According to the Coase theorem, the externalities can be dealt with inefficiencies such as by using private bargaining because it could be a substitute for legal liability support to sort out the conflict through the efforts to avoid any kind of harmful behavior by compensating the harmed party. It means the legal rights of the parties involved are clearly defined in the Coase theorem to get legal support. The transaction cost is less and there are not many parties involved and no ambiguity about legal rights. Therefore, all options: a, b, c, and d are incorrect.

Here, the correct option is e (the legal rights of the parties involved are clearly defined).

Economics Concept Introduction

Introduction: Externality problems such as pollution refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market.