According to the Coase theorem, what can resolve externality problems under certain conditions?

The Coase theorem posits that under certain conditions, private negotiations between parties can effectively resolve externality problems without the need for government intervention. The theorem suggests that if property rights are well-defined and transaction costs are low, parties can negotiate to reach an efficient outcome that takes into account the external costs or benefits associated with their activities.

For example, if a factory's emissions negatively impact nearby residents, those residents could negotiate with the factory owner, perhaps agreeing on compensation for the pollution or a reduction in outputs that would mitigate the harm. This negotiation allows the affected parties to reach a mutually acceptable solution that reflects their preferences and costs.

In contrast, government regulation typically involves imposing rules or standards, while market forces alone may not account for external effects without intervention. Similarly, increased taxation tends to address externalities by raising the costs of certain behaviors, but it doesn't harness the potential for private parties to find solutions themselves. Therefore, the effectiveness of bargaining emphasizes the ability of individuals to negotiate solutions when the conditions specified by the Coase theorem are met, illustrating the role of private resolution in the context of externalities.