Coase bargaining could solve an externality problem under which conditions?

• A. Private talks are infeasible due to high transaction costs.
• B. Private talks allow parties to internalize externalities if transaction costs are low and property rights clear.
• C. Government regulation is always unnecessary.
• D. Courts always resolve all externalities.

Answer: (B)

The idea here is the Coase theorem: when property rights are clear and transaction costs are low, the parties affected by an externality can bargain privately to reach an outcome that reflects the true social costs and benefits, effectively internalizing the externality. This is why private talks can solve the problem under those conditions—because they enable a mutually beneficial agreement without needing government intervention. If transaction costs are high or rights are not well defined, bargaining may fail, which is why government action might be needed in those cases. The other statements are too absolute or inaccurate: regulation isn’t always unnecessary, and courts don’t guarantee resolution of all externalities.