Question

When traffic gets congested, there are negative externalities. For big cities, this creates inefficiency. Could the Coase Theorem fix this problem?

a. Yes, it can. The government could assign property rights: X number of drivers can be on the road during peak hours. Everyone could then negotiate an efficient solution.

b. No, because bargaining costs are too high.

c. No, because the government doesn’t have enough information to solve the problem.

d. Both b and c.

Answer 1

The correct answer is: b. No, because bargaining costs are too high.

The Coase theorem proposes that in the face of market inefficiencies resulting from externalities, private parties can negotiate a mutually beneficial, socially desirable solution. But for this to be possible, it assumers that there are no transactions costs and the number of people involved are very less.

A Coase Theorem for traffic regulation in big cities is highly unlikely since the number of people involved is large and the transaction/ bargaining costs are too high.