What is the role of property rights in solving externalities, and how can Coase bargaining work?

• A. Coase bargaining requires no property rights and can solve externalities regardless of bargaining costs.
• B. Clear property rights enable bargaining and, if bargaining costs are low, resources move to efficient allocation.
• C. Government regulation is always preferred to bargaining.
• D. Externalities cannot be solved through private bargaining.

Answer: (B)

Clear property rights let the people affected by an externality bargain over how a resource is used. When bargaining costs are low, they can negotiate a deal that internalizes the external effect, so resources shift toward the efficient allocation where the social costs and benefits are balanced. This is the heart of the Coase idea: if rights are well-defined, the initial owner of those rights doesn’t lock in an inefficient outcome—the parties can trade to reach the socially optimal use as long as transactions are cheap enough to conduct. If bargaining costs are high or rights aren’t clear, negotiations may fail or be inefficient, and some form of policy intervention might be needed.