The Coase Theorem suggests that under its assumption, the efficient solution to an externality problem:
a. depends on who owns property rights to the resources.
b. is enhanced by government involvement in the negotiations.
c. can be enhanced through the use of taxes.
d. does not depend on the distribution of property rights.
Question 2
Suppose the production of helicopters is an industry characterized by increasing returns to scale and an Argentine firm, Cicare, is the only player in this market. The firm caters to the global market and earns a profit of 10 million. Flettner, a German firm has been considering entering this market for a while, but it is aware that its entry will cause each firm to lose about 4 million. However, a government subsidy allows Flettner to enter the helicopter market and Cicare incurs a loss of 4 million due to its entry. Eventually, Flettner evolves as the monopoly supplier of helicopters while Cicare is forced to shut down. This conclusion rests on which of the following assumptions?
a. The German government was experiencing a budget surplus.
b. There was low demand for Cicare automobiles in the world market.
c. The German government was able to forecast accurately the subsidy required to induce Flettner to produce helicopters.
d. The quality of Flettner's helicopters were inferior compared to that of Cicare's.
e. Cicare diversified into the production of automobiles.
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