Suppose that a large tree on Steves property is blocking Edi

Suppose that a large tree on Steve\'s property is blocking Edith\'s view of the lake below. Steve accepts Edith\'s offer to pay Steve $100 for the right to cut down the tree. Based on readings in this chapter, this situation would be an example of _____.

Solution

This situation is an example of Coase Theorem. Coase Theorem of solving externality states that private economic actors can solve the problem of externalities among themselves. Whatever the initial distribution of Rights, the interested parties can always reach an efficient outcome through bargaining in which everyone is better off.