Asked by Jacqueline Segura on Apr 26, 2024
Verified
Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $20. Assuming no transaction costs, an efficient solution would be for Sophia to pay Gabriel $15 to not recline his seat.
Transaction Costs
Expenses incurred in buying or selling a good or service, including search and information costs, bargaining costs, and enforcement costs of policies.
Efficient Solution
An outcome where resources are allocated in the most effective manner, maximizing benefits and minimizing costs or waste.
- Comprehend and elucidate the notion of property rights and their effects on market efficacy.
Verified Answer
CG
Charles GriswoldMay 01, 2024
Final Answer :
True
Explanation :
According to the Coase Theorem, if transaction costs are negligible and property rights are clearly defined, parties will negotiate to reach a mutually beneficial and efficient outcome regardless of the initial allocation of rights. In this case, Sophia values the seat not being reclined more than Gabriel values his right to recline. Therefore, it's efficient for her to compensate him to not recline, and $15 is an amount that benefits both, making it a Coasean solution.
Learning Objectives
- Comprehend and elucidate the notion of property rights and their effects on market efficacy.
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