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:

Required Rates Of Return

The minimum annual percentage earned by an investment that will entice individuals or companies to put money into a particular project or investment.

Beta

Beta measures the tendency of a security's returns to respond to swings in the market, providing insight into its relative risk.

Dividend Growth Rate

The dividend growth rate is the annual percentage rate at which a company's dividend payments to shareholders increase over time.

SML

The Security Market Line (SML) is a line that represents the risk-return relationship of the market at a given time, as described in the Capital Asset Pricing Model (CAPM).