Correct option is B
Correct Option: B. Presence of income effect
Explanation:
The Coase Theorem states that if property rights are well-defined and transaction costs are zero, bargaining between parties will lead to an efficient outcome regardless of who initially holds the rights.
Information Booster:
- Income effect is NOT an assumption of the Coase Theorem
- The theorem assumes income effects are negligible - that the distribution of wealth doesn't affect the valuation of the externality
- When income effects are significant, the initial assignment of property rights can affect the efficient outcome
Additional Knowledge:
- Option A. Absence of transaction costs - Critical assumption for efficient bargaining
- Option C. Complete information - Both parties must know each other's costs and benefits
- Option D. Complete property rights - Rights must be clearly defined and enforceable