The theorem stating that private bargaining can solve externalities when property rights are clear and transaction costs are low is the Coase theorem.
Associated with economist Ronald Coase, the theorem says that parties affected by an externality can negotiate toward an efficient allocation of resources when bargaining is costless or very inexpensive. In the idealized version, the final efficient outcome does not depend on who initially holds the legal right, although the initial assignment can affect wealth and who pays whom.
Coase developed the underlying insight in his analysis of social cost and external effects. His 1960 article, “The Problem of Social Cost,” emphasized that real-world transaction costs matter greatly. Negotiations can fail when many parties are involved, information is incomplete, rights are unclear, or organizing a deal is expensive.
The theorem therefore does not claim that private bargaining always fixes pollution or other externalities. Rather, it provides a benchmark for comparing private negotiation, legal rules, taxes, regulation, and other institutions.