Which of the following economic theorems states that under conditions of perfect competition, private parties can solve the problem of externalities efficiently through negotiation, provided transaction costs are low and property rights are clearly defined?

💡 Solution & Explanation

The Coase Theorem posits that economic efficiency can be achieved through private bargaining and negotiation between affected parties when property rights are clearly assigned and transaction costs remain negligible. Alternative theorems such as Arrow's Impossibility Theorem deal with social choice theory and voting paradoxes rather than market externalities. This microeconomic principle demonstrates that legal frameworks defining property rights can resolve pollution and resource allocation issues without direct government intervention.