Which statement best captures Coase's view on externalities?

• A. Externalities cannot be resolved without government intervention
• B. Only taxes can correct externalities
• C. Clearly defined property rights and laws can incentivize parties to internalize externalities
• D. Externalities do not affect efficiency

Answer: (C)

The main idea is that externalities can be internalized through private bargaining when property rights are clearly defined. Coase argued that if rights are well-specified and transaction costs are low, the affected parties can negotiate arrangements that make everyone better off by accounting for the external effect. The efficient outcome depends on the possibility of bargaining and the enforceability of agreements, not on who initially holds the rights. That’s why the statement that clearly defined property rights and laws can incentivize parties to internalize externalities best captures Coase’s view. In the real world, high transaction costs or vague rights can hinder private solutions, which is why some situations still need policy tools, but the core message remains: private bargaining can align incentives when rights are well-defined.