Which of the following conditions contributes to the resolution of externality problems as suggested by the Coase theorem?

Question

BlackTom AI · Accepted Answer

Clear definition of legal rights enables the parties to identify entitlements and bargain over them, which is the key mechanism the Coase theorem relies on.

1) Relevant knowledge points and concepts
- Externality: a cost or benefit affecting third parties not reflected in market prices.
- Coase theorem (informal): If transaction costs are negligible and property rights are well-defined, private bargaining between parties will lead to an efficient allocation of resources regardless of the initial assignment of rights.
- Transaction costs: costs of negotiating, enforcing, and implementing agreements (information, bargaining, enforcement, coordination).

2) Step-by-step reasoning
- An externality problem exists because one party’s action imposes external costs/benefits on another.
- For bargaining to internalize that externality, parties must know who currently holds the entitlement (the right to act or to be free from harm).
- If legal rights are clearly defined, parties can negotiate transfers or side-payments to reach an efficient outcome: the party who values the entitlement most will acquire it.
- Clear rights lower negotiation uncertainty, reduce disputes over entitlements, and simplify enforcement, thereby reducing transaction costs and facilitating agreement.

3) Intermediate logical steps (no numeric calculations required)
- Ambiguity in rights → uncertainty about entitlement → increased bargaining and enforcement costs → bargaining may fail.
- High transaction costs, many affected parties, or social awkwardness increase coordination problems and prevent efficient bargaining.
- Conversely, clearly defined rights streamline offers, reduce holdout/free-rider problems, and make bargaining feasible.

4) Why the correct answer is correct
- The Coase theorem explicitly requires well-defined property rights so parties know what can be traded; without this clarity, private bargaining cannot reliably achieve an efficient outcome.

5) Why other options are incorrect
- "It is awkward for the parties to approach each other": increases transaction costs and hinders bargaining.
- "There is ambiguity about the legal rights": directly contradicts the requirement of well-defined rights.
- "There are many parties involved": raises coordination, holdout, and free-rider problems, increasing transaction costs.
- "Transaction costs are high": prevents bargaining that the Coase theorem depends on.

6) Conclusion
Therefore the condition that contributes to resolving externality problems per the Coase theorem is that the legal rights of the parties involved are clearly defined, which matches the provided correct answer.

Which of the following conditions contributes to the resolution of externality problems as suggested by the Coase theorem?单项选择题

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