Coase and economics: study guide

1. What is the Pigouvian approach to handling external costs?
   

2. According to Friedman, what are the three ways that Coase felt Pigou's analysis was wrong?
   

3. Would Coase argue that the Pigouvian remedy for external costs is always wrong? If so, why? If not, when would it not be wrong?
   

4. According to Coase, who is responsible for external costs?
   

5. Do externalities always cause inefficiency? Why or why not?
   

6. How would you state the Coase theorem, which is based on "The Problem of Social Cost"?
   

7. Consider the following assertion:
       When the conditions of the Coase theorem are met, the final allocation of resources is
           (1) efficient (the efficiency hypothesis) and
           (2) invariant (the invariance hypothesis)
       regardless of how the courts decide to assign property rights.
   Decide whether you agree or disagree with each hypothesis.
   

8. What are some examples of transactions costs?
   

9. According to Coase, how should the "legal system" respond to a world in which transactions costs exist?
   

10. What "particular example" did Pigou choose to illustrate the issue of compensation for external costs? Why did Coase consider the choice "strange"?
    

11. What policy options does Coase consider for dealing with externalities?
    

12. Consider how you would briefly summarize and assess the Coase article, "The Problem of Social Cost."