The Coase Theorem Asserts That, If Externalities Are Present and If

question 226

Multiple Choice

The Coase theorem asserts that, if externalities are present and if private parties can bargain over the allocation of resources at no cost, then

• A)the private market will reach an equilibrium in which resources are allocated inefficiently.
• B)the private market will reach an equilibrium in which resources are allocated efficiently.
• C)the private market cannot reach an equilibrium.
• D)a mixture of corrective taxes and subsidies is necessary for a socially optimal equilibrium.

---

Definitions:

Long-Run Equilibrium

A state in economic theory where all factors of production are fully adjustable, allowing for optimal resource allocation and full competition.

Increasing-Cost Industry

An industry in which production costs increase as the entire market expands production, often due to finite resources.

Long-Run Equilibrium

A state in which all inputs are variable, enabling firms to make adjustments to output and prices to reach a point where no firm desires to change its production or exit the market.

Increasing Cost Industry

An industry in which production costs increase as output expands, often due to limited resources or other constraints.