Question

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)

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