Question

Explain the Coase Theorem. Be sure to include key assumptions, key take-aways, and ways a rm could \overcome" the implications of the result.

Answer 1

According to the coase theorem two disputing parties can bargain with each other and agree to an allocation of resources that is Pareto efficient, regardless of the party to whom property rights are initially assigned. Consider two parties A and B. Bith disagree on the optimal level of pollution. A owns paper mill and has little incentive to abate pollution. B runs a rafting business downstream and is negatively affected by pollution created by A.