According to the Coase theorem, what is the condition for private bargaining to lead to an efficient solution to externalities?

The Coase theorem asserts that private bargaining can lead to an efficient solution to externalities if transaction costs are low. This idea is grounded in the notion that when parties can negotiate without significant barriers, they can reach mutually beneficial agreements that allocate resources efficiently, irrespective of the initial distribution of property rights.

Low transaction costs enable parties to effectively communicate, negotiate, and come to terms that internalize the externality, allowing them to avoid the inefficiencies caused by external effects. In cases where transaction costs are low, it means that the costs associated with making a deal—such as finding bargaining partners, negotiating terms, and enforcing agreements—are minimal. This facilitates agreements that reflect the true value of the externalities involved.

In contrast, high transaction costs can hinder such negotiations, making it difficult for parties to arrive at an agreement. Government intervention or the absence of property rights can also complicate the process but are not conditions that support the core principle of the Coase theorem regarding efficient bargaining outcomes. Therefore, low transaction costs are crucial for achieving effective bargaining resolutions to externalities.