Which of the following is a disadvantage of relying on private enterprise to solve externalities according to the Coase Theorem?

• A. Private enterprise always leads to government intervention.
• B. High transaction costs can prevent efficient bargaining between parties.
• C. The Coase Theorem requires that property rights are undefined.
• D. Private solutions guarantee that all externalities are eliminated.

Answer: (B)

Verified step by step guidance

1. Understand the Coase Theorem: It states that if property rights are well-defined and transaction costs are zero, private parties can negotiate to solve externalities efficiently without government intervention.
2. Identify the key assumptions of the Coase Theorem: well-defined property rights and zero or very low transaction costs.
3. Recognize that in reality, transaction costs (such as bargaining costs, legal fees, or information costs) are often present and can be high.
4. Analyze how high transaction costs affect private bargaining: they can prevent parties from reaching an efficient agreement, thus limiting the effectiveness of private solutions to externalities.
5. Conclude that a major disadvantage of relying on private enterprise to solve externalities, according to the Coase Theorem, is that high transaction costs can prevent efficient bargaining between parties.