According to the Coase Theorem, private parties can solve the problem of externalities if:

• A. all parties have equal bargaining power regardless of costs
• B. externalities are only positive and not negative
• C. property rights are well-defined and transaction costs are low
• D. the government imposes a corrective tax on the externality

Answer: (C)

Verified step by step guidance

1. Understand the Coase Theorem: It states that if property rights are clearly defined and transaction costs are negligible, private parties can negotiate to resolve externalities efficiently without government intervention.
2. Identify the key conditions required for the Coase Theorem to hold: (1) well-defined property rights, and (2) low or zero transaction costs that allow bargaining.
3. Recognize that equal bargaining power is not a necessary condition; the theorem focuses on the ability to negotiate rather than equal power.
4. Note that the theorem applies to both positive and negative externalities, so the nature of the externality (positive or negative) is not a limiting factor.
5. Understand that government intervention, such as corrective taxes, is not required under the Coase Theorem if the conditions are met, as private negotiation will lead to an efficient outcome.