The Distribution of Surplus Gained from Private Parties Solving an Externality

question 39

Multiple Choice

The distribution of surplus gained from private parties solving an externality problem on their own,as described by the Coase theorem,is dependent on:

• A) who has more power to see to enforcement.
• B) which party has more negotiating power or wealth.
• C) where the initial rights of the parties lie.
• D) None of these statements is true.

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Definitions:

Diseconomies of Scale

The phenomenon where, as a firm expands, its costs start increasing per unit of output, usually due to inefficiencies and management challenges that arise with size.

Diminishing Returns

A principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase and may decrease.

Natural Monopoly

A market structure where a single provider is more efficient in supplying the entire market with a product or service, due to high fixed or startup costs.