Question

Clearly explain the "Coase theorem." What is the implication of ridership on the theorem?

Answer 1

Coase theorem:.

Assuming that the negotiations are costless , & owner of resources can identify the source of damages to their property and legally prevent damages,

Then the Coase theorem says that under these assumptions , the efficient amount of good involved in externalities that is a socially efficient solution will be achieved independently of who is assigned property rights, as long as someone is assigned these rights ,.

but the distribution of profit will depend on the initial assignment of property rights

so it implies that once property rights are established, then no government intervention is required to deal with externalities in terms of tax ,subsidy and regulation.

This theorem is more relevant for cases in which only few parties are involved and sources of externalities are well defined