In markets with externalities, if property rights are assigned unambiguously and if the parties involved can negotiate costlessly, then the Coase theorem suggests that the parties will never arrive at a Pareto-optimal outcome unless the government intervenes.

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The Coase theorem suggests that even in the presence of externalities, a Pareto-optimal outcome can be reached through negotiation and assigning property rights, without government intervention, as long as transaction costs are low. However, in reality, transaction costs may make negotiations difficult or impossible, leading to suboptimal outcomes.

In Markets with Externalities, If Property Rights Are Assigned Unambiguously