Question from Past Microeconomics Qualifying Exam[]

Fall 2000 - Section I, Question eight, 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.

If the conditions of the Coase Theorem hold, we should never observe an uninternalized externality.


The Coase theorem states that outcomes are efficient if transaction cost is negligible. Externalities can be internalized if the transaction cost of doing so is low enough. Therefore if the negligible transactions cost condition of the Coase Theorem holds, all externalities would be internalized.

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