Question

Which of the following statements is FALSE?

A. When products that create positive externalities are produced, at the market equilibrium output, the marginal social benefit generated by consuming the product exceeds the marginal private benefit. B. When there is a negative externality, the competitive equilibrium output is greater than the economically efficient output level. C. The marginal social benefit of a given level of production of a public good is the vertical sum of all marginal private benefits for that level of production. D. The Coase Theorem asserts that government intervention is a prerequisite for addressing externality problems.

Answer 1

All the above statements are correct except D. D is the false one because the course theorem never asserts that government intervention is a prerequisite for addressing externality problems. The Coase theorem asserts that there are proficient competitive market, property rights are properly assigned and there are no Transaction Costs, then bargaining among parties associated with the Externalities may lead to an efficient outcome. Hence, this framework of Coase theorem never assert that Government intervention is a prerequisite for addressing externality problems rather it asserts that the parties may among themselves through private mechanism i.e, bargaining can solve the problem of externality.

Hence, Option D is correct.