Coase argues that externalities do not create inefficiencies as long as property rights are clearly established. He

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Question:

Coase argues that externalities do not create inefficiencies as long as property rights are clearly established. He notes that the external cost of pollution that is imposed on citizens by a product can be rephrased as an external cost of not polluting that is imposed on a producer by citizens. He argues that a free market will choose the outcome that is efficient if people can trade these property rights since the agent with the highest cost/largest benefit will be willing to pay for the right.

Describe two problems with this argument? Under what circumstances would you expect Coase's solution to externalities to work well, and when might it lead to very inefficient outcomes? Explain.