According to the Coase Theorem, under what condition regarding property rights does bargaining lead to an efficient outcome?

• A. Only when the government owns the property rights
• B. Only when the affected party owns the property rights
• C. Only when the party causing the externality owns the property rights
• D. When property rights are clearly defined and enforceable, regardless of who owns them

Answer: (D)

Verified step by step guidance

1. Understand the Coase Theorem: It states that if property rights are well-defined and transaction costs are negligible, parties can bargain to reach an efficient allocation of resources regardless of who initially holds the rights.
2. Identify the key condition: The theorem emphasizes the clarity and enforceability of property rights, meaning that the rights must be clearly assigned and legally protected so that parties know their entitlements.
3. Recognize that the initial allocation of property rights does not affect efficiency: Whether the government, the affected party, or the party causing the externality owns the rights, bargaining can lead to an efficient outcome as long as rights are clear and enforceable.
4. Note the importance of low transaction costs: For bargaining to be effective, the costs of negotiating and enforcing agreements must be minimal; otherwise, the efficient outcome may not be reached.
5. Summarize the condition: Bargaining leads to an efficient outcome when property rights are clearly defined and enforceable, regardless of who owns them.