Which scenario represents an efficient private solution to a negative externality?

An efficient private solution to a negative externality occurs when the parties directly involved in the externality can negotiate and reach an agreement that accounts for the costs imposed on each other. This scenario exemplifies the Coase Theorem, which suggests that if property rights are clearly defined and transaction costs are low, parties can negotiate to mutually beneficial outcomes without the need for government intervention or third-party involvement.

In the context of a negative externality, such as pollution from a factory affecting nearby residents, the factory owner and the affected residents can negotiate terms that might include compensation for the residents in exchange for continued operations or modifications to reduce the negative impact. This private arrangement allows both parties to account for the external costs and come to a more efficient outcome, aligning their interests in a way that a government solution or legal action might not achieve as effectively.

Government regulations or third-party interventions, while they can address negative externalities, often introduce additional costs, potential inefficiencies, and may not fully align the interests of the parties involved. Legal action can lead to a resolution but can be costly and time-consuming, often resulting in outcomes that might not be mutually beneficial or efficient. Hence, negotiation among the involved parties is the most efficient solution.