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Question from Past Microeconomics Qualifying ExamEdit

Spring 1999- Section I, Question seven, George Mason University

True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.

According to the Coase theorem, the distribution of resources within an Edgeworth Box (e.g. the initial property rights) will not affect the final outcome of exchange.

AnswerEdit

The Coase theorem (Coase, 1960) states that if transaction costs are low or non-existent, property rights are clearly defined, and there are no wealth effects, then an efficient market outcome will be attainable regardless of any initial property rights. As long as all of these assumptions hold, then the final outcome will be achieved regardless of the distribution within the Edgeworth box. This outcome occurs because voluntary transactions of actors occur regardless of who owns the property rights (See Nicholson p534)

SourcesEdit

  • R. H. Coase, Journal of Law and Economics, Vol. 3. (Oct., 1960), pp. 1-44.

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