Question

Can government assignment and enforcement of property rights internalize an externality? Will this approach work as well as, better than, or worse than direct government intervention? Explain and describe one of the difficulties associated with this solution?

Answer 1

Externalities can be internalized if property rights are clearly demarcated. Such a solution was recommended and suggested by Coase, thus it is also called the Coase theorem.

But property rights assignments do not always address the problem of externality. Here, if the group size becomes larger, the free-rider problem hinders the process of internalization of externality. Thus, the problem will not be solved and government intervention would be required to address it.

Free rider problem can be addressed only if government come to deal with externality.