Which of the following is a problem associated with the Coase Theorem?

• A. It requires that property rights be undefined for negotiations to occur.
• B. It guarantees that all externalities will be eliminated without negotiation.
• C. High transaction costs can prevent parties from reaching an efficient agreement.
• D. It assumes that government intervention is always necessary to solve externalities.

Answer: (C)

Verified step by step guidance

1. Understand the Coase Theorem: It states that if property rights are well-defined and transaction costs are zero, parties can negotiate to correct externalities and reach an efficient outcome regardless of the initial allocation of rights.
2. Identify the assumptions of the Coase Theorem: These include clearly defined property rights, zero or very low transaction costs, and the ability of parties to negotiate without barriers.
3. Analyze each option in the problem: For example, the theorem requires property rights to be defined, not undefined; it does not guarantee elimination of all externalities without negotiation but rather that negotiation can lead to efficient outcomes; it does not assume government intervention is necessary.
4. Recognize the main problem with the Coase Theorem in real-world applications: High transaction costs (such as bargaining costs, enforcement costs, or information costs) can prevent parties from reaching an efficient agreement, which limits the theorem's practical applicability.
5. Conclude that the correct problem associated with the Coase Theorem is that high transaction costs can prevent efficient negotiation, making it difficult to solve externalities through private bargaining alone.