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Not all externality problems can be solved by the private sector. True or false? Explain your...

Not all externality problems can be solved by the private sector. True or false? Explain your answer making reference to the Coase Theorem. (20 marks, approximately 300 words)

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Answer #1

Answer - false

Reason-

  • Coase theorm states that all externality problems can be solved the private sectors without the government intervention
  • Accordingly to coase theorem parties which are affected to externalities will find themselves such an outcome which will be efficient for them
  • If there is any possibility of trade in externalities then the transaction cost will be zero due to which bargaining in private sector will lead to an outcome which is efficient
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