Is it true that if transaction costs are low, private bargaining will always result in an efficient solution to externalities?

The assertion that private bargaining will always result in an efficient solution to externalities when transaction costs are low is not necessarily true, hence the correct response is that it is false. While low transaction costs can facilitate negotiations between parties affected by externalities, several conditions must also be met for private bargaining to lead to an efficient outcome.

For effective bargaining, affected parties need to have clear property rights and the ability to negotiate without significant barriers. Furthermore, the nature and scope of the externality itself can affect the bargaining process. For example, if there are many parties involved, coordination becomes more challenging, and the potential for inefficiency increases despite low transaction costs.

In addition, even when transaction costs are low, externalities can persist if one of the parties involved does not have adequately defined rights or if information asymmetries exist, which can hinder fair negotiation. Therefore, while low transaction costs are beneficial, they are not a guarantee of achieving an efficient solution through private bargaining alone.