The Coase Theorem Implies That Victims of Pollution Should Be

question 41

Multiple Choice

The Coase Theorem implies that victims of pollution should be able to pay polluters not to pollute if the victims value a reduction in pollution more than the polluters value the production of the pollution. Which of the following does not explain why this type of payment does not work in "real life"?

• A)If there are many victims, the costs to them of organizing may be quite high.
• B)If there are many firms in the industry, it may be difficult for the victims to negotiate with all of the firms.
• C)The victims may have trouble quantifying the value to them of reducing the pollution.
• D)Bargaining costs are likely to be small in this case, so the theorem does not apply.

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Definitions:

Floating-rate Debt

Debt instruments, such as bonds or loans, that have variable interest rates that adjust over the tenure of the obligation.

Market Interest Rate

The prevailing rate at which interest is offered on deposits or loans in the financial markets for a particular term and risk profile.

Effective Interest Rate

An adjusted interest rate that accurately reflects the cost of borrowing including fees and compounding.

Stated Rate

The annual interest rate declared on a loan or investment, not accounting for compounding or additional fees.