Refer to Figure 5-9. Let's suppose the government imposes a tax ...

[tuffie]

Refer to Figure 5-9. Let's suppose the government imposes a tax of 50 per unit of toilet paper to bring about the efficient level of production. What happens to the market price of toilet paper?
 
  A) It rises by more than 50 per unit.
  B) It rises by 50 per unit.
  C) It rises by less than 50 per unit.
  D) It remains the same because the tax is imposed on producers who create the externality.

Question 2

Explain why in situations where the Coase Theorem applies, bargaining power does not influence whether the efficient outcome is reached, but affects the distribution of gains.
 
  What will be an ideal response?

[batool]

Answer to Question 1

C

Answer to Question 2

The Coase Theorem applies when parties can negotiate at zero cost. If they can negotiate at zero cost then they should always choose the efficient outcome since the efficient outcome maximizes the sum of their benefits from an agreement. Bargaining power determines how the sum of the benefits is divided between the two parties. In the divorce example in this chapter, Adam and Barb should decide not to divorce since not divorcing maximizes the sum of their benefits. The Coase Theorem predicts they will not divorce regardless of how the divorce law in their state is written. The divorce law will, however, be a factor in how the gains from remaining married are divided between them.

[tuffie]

TYSM

[ryhom]

YES! Correct, THANKS for helping me on my review