The Proposition That If Private Parties Can Bargain Without Cost

question 223

Multiple Choice

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called

• A)the Pigovian theorem.
• B)a corrective tax.
• C)the externality theorem.
• D)the Coase theorem.

---

Definitions:

Entrepreneur's Forgone Interest

The potential income an entrepreneur sacrifices by investing resources in their own business rather than applying them elsewhere.

Marginal Product

The additional output resulting from the use of one more unit of a factor of production, holding other factors constant.

Marginal Cost

Refers to the increase in total cost that arises from producing one additional unit of a good or service.

Short-Run Cost Curves

Graphical representations that show how a firm's costs vary with output level in the short term, where at least one factor of production is fixed.