State the Coase theorem's main idea.

• A. Well-defined property rights and low transaction costs hinder private bargaining from internalizing externalities.
• B. Conclusion: private bargaining is not effective.
• C. Well-defined property rights and low transaction costs allow private bargaining to internalize externalities and reach the efficient outcome.
• D. Only public sector solutions can reach efficient outcomes.

Answer: (C)

The main idea being tested is that private bargaining can solve externalities if property rights are clearly defined and transaction costs are low. When rights to a resource are well established and it’s cheap to negotiate, the affected parties can trade, compensate, or bargain to reach the level of activity that maximizes total welfare. In that scenario, the externality is internalized through voluntary agreement, and the efficient outcome is achievable without government intervention. The exact distribution of rights might change who pays whom, but it doesn’t prevent reaching the efficient allocation.

The other statements contradict this: they imply bargaining won’t work or that only public policy can achieve efficiency, which goes against the idea that, under these conditions, private negotiation suffices to internalize the externality.