Which statement best describes the Coase Theorem's premise?

• A. Coase Theorem promotes government intervention as the primary tool.
• B. Assigning property rights and allowing bargaining; low transaction costs.
• C. It requires command-and-control regulations.
• D. It assumes zero externalities exist.

Answer: (B)

If property rights are clearly defined and the costs of bargaining are low, parties affected by an externality can negotiate a private agreement that leads to an efficient outcome. This is why assigning property rights and allowing bargaining with low transaction costs best describes the Coase Theorem’s premise. It shows how private negotiations can internalize externalities without needing government intervention or command-and-control rules. The theorem also does not assume there are no externalities; rather, it explains how they can be resolved through bargaining when bargaining is cheap. The initial allocation of rights may affect who pays or gains financially, but not the overall efficiency, provided transaction costs remain low.