What does the Coase theorem suggest?

The Coase theorem posits that under certain conditions, private parties can negotiate solutions to externalities without the need for government intervention, leading to efficient outcomes. Specifically, the theorem suggests that if property rights are well-defined and transaction costs are low, individuals or businesses can engage in bargaining to arrive at mutually beneficial agreements. This means that they can effectively internalize the external costs or benefits associated with their actions, thereby addressing externalities through negotiation rather than relying on regulations or government mandates.

For example, if a factory's emissions negatively impact the surrounding community, the factory owner and affected residents could negotiate a compensation agreement or find a way to reduce the emissions through cooperation, creating an efficient resolution without government involvement. This insight highlights the potential for market solutions to resolve conflicts arising from externalities when the necessary conditions of clear property rights and low transaction costs are met.