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Question from Past Microeconomics Qualifying ExamEdit

Fall 2005 - Section I, Question five, George Mason University

T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

The Coase Theorem argues that externalities are self-correcting—no matter how property rights are assigned, efficient outcomes will always be achieved by the affected parties.

AnswerEdit

False. The Coase Theorm states that assuming negligible transactions cost an efficient outcome will be achieved. So assuming zero or negligible transactions cost externalities will be internalize independent of how property rights are assigned. But the statement is incomplete and the word always must suspect because of the sheer number of situations with non-zero transactions costs.

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