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6 months ago
Write a short note on the Coase theorem.
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Business and Its Environment
Edition: 7th
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The Coase theorem pertains to market imperfections, including externalities and public goods. It focuses on the standard of social efficiency and provides a conceptual foundation for both regulation and the liability system. The theorem does not address other standards, such as distributive objectives and social justice, that could be used in evaluating alternative social arrangements and public policies. Coase's (1}  original exposition focused on externalities. Coase observed that an externality is reciprocal in the sense that at least two parties are required. In the case of noise pollution, there would be no externality without the polluter or in the absence of anyone to hear the noise. The Coase theorem states that, in the absence of transactions costs that would impede the bargaining over these private agreements, the socially efficient outcome can be realized if the entitlement is assigned to either party. The role of government thus is to clearly assign entitlements to the parties and allow them to reach private agreements that internalize the externality. Although social efficiency is attained with either assignment of the entitlement, the assignment affects the distribution of the social costs of the externality and its control.
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