According to Coase Theorem, in the case of negative externality, which of the following conditions is...
According to Coase Theorem, in the case of negative externality, which of the following conditions is necessary to achieve allocative efficiency among a small number of parties?
a. The deadweight loss of externality should be greater than the transactions cost.
B. The deadweight loss of externality should be smaller than the transactions cost.
C. The transactions cost should be small regardless of the size of the deadweight loss.
D. The deadweight loss should be small regardless of the size of the transactions cost.
E. None of the above.
Homework Answers
C.
The transaction cost should be small regardless of the size of the dead weight loss.
Explanation:
One of the assumptions of Coase theorem is that transaction cost is negligible or almost equal to zero.
If this assumption holds then efficiency can be achieved regardless of the size of the deadweight loss.
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