What is a non-market solution to externalities?

• A. Private bargaining under the Coase theorem; property rights allocation; social norms.
• B. Private bargaining can solve externalities when transaction costs are low.
• C. Taxes are always necessary for externalities.
• D. Regulation is the only solution.

Answer: (B)

Private bargaining can solve externalities when transaction costs are low. When property rights are clearly defined and the costs of bargaining, finding a partner, negotiating, and enforcing an agreement are small, the interested parties can bargain a deal that makes both sides better off and internalizes the external effect. This is the essence of the Coase theorem: no government action is needed if bargaining is feasible and cheap, because the parties will reach a mutually beneficial arrangement that leads to an efficient outcome.

If transaction costs are high, bargaining becomes impractical, and government tools like taxes or regulations may be necessary. The other options describe government interventions or mix in broader informal mechanisms, but they do not capture the crucial condition that makes private bargaining a viable, non-market solution.