Under what condition might private bargaining fail?

• A. When property rights are well defined but transaction costs are very low.
• B. When there are only two parties.
• C. When parties cannot bargain because of high transaction costs.
• D. When transaction costs are high or many parties involved.

Answer: (D)

Private bargaining to fix externalities works best when property rights are clearly defined and the costs of bargaining are low. When those costs balloon—whether because negotiating, coordinating, or enforcing agreements is expensive, or because many different people are affected and it’s hard to bring everyone to the table—private bargaining struggles to reach an feasible, efficient agreement. In such cases the bargaining process itself becomes prohibitively costly or unwieldy, so the outcome isn’t efficiently internalized. That’s why the condition describing high transaction costs or many parties involved is the scenario under which private bargaining fails.