A foundational economic argument suggests that if property rights are clearly defined and it is costless for parties to bargain, they can negotiate to solve problems like pollution on their own. The economist who developed this argument, however, viewed this specific scenario as a simplified starting point. What was the ultimate purpose of establishing this baseline, and what kind of economic system was he truly aiming to understand?

The Utility of Simplified Economic Models

Critiquing a Simplified Economic Argument

Evaluating a Policy Proposal

Ronald Coase's primary contribution to the study of externalities was to demonstrate that, in most real-world scenarios, private bargaining is an effective solution as long as property rights are clearly defined.

An economist argues that his analysis of a world with zero transaction costs—where private bargaining perfectly resolves issues like pollution—is not meant as a description of reality. Instead, he considers it a necessary first step. Which of the following best explains the logical next step in this economist's research program, based on this starting point?

The Role of Economic Institutions

Competing Economic Philosophies

An economist wants to understand why institutions like firms or government regulations are often necessary to coordinate economic activity. To do this, he follows a specific analytical path that starts with a highly simplified world. Arrange the following steps to reflect the logical progression of his argument, from the simplified starting point to the analysis of the real world.

The 'Stepping Stone' Argument