If private bargaining to resolve an externality is to result in an efficient outcome,
A) rights must be protected by liability rules.
B) there must be tradable pollution rights.
C) there must be direct regulation of externalities.
D) the initial assignment of rights must be clear to both parties.

Question

Quizplus · Accepted Answer

For private bargaining to effectively resolve an externality and reach an efficient outcome, it's crucial that the initial assignment of rights (whether it's the right to pollute or the right to clean air, for example) is clearly defined and understood by all involved parties. This principle is outlined in the Coase Theorem, which posits that if property rights are well-defined and transaction costs are low, parties can negotiate to correct for externalities and reach an efficient outcome, regardless of the initial allocation of rights.

If Private Bargaining to Resolve an Externality Is to Result