What is the Coasean solution?

The Coasean solution, named after economist Ronald Coase, refers to a theoretical framework for resolving externalities in economics. It suggests that if property rights are well-defined and transaction costs are low, then private parties can negotiate and reach an efficient outcome without the need for government intervention.

In the presence of externalities, such as pollution or noise, the Coasean solution proposes that affected parties can bargain and internalize the externality by reaching a mutually beneficial agreement. This agreement could involve the payment of compensation from the party causing the externality to the affected party, or the establishment of property rights that allow the affected party to charge a fee for the harm caused.

According to the Coase theorem, the allocation of resources will be efficient regardless of the initial assignment of property rights, as long as transaction costs are low. This means that the outcome will be the same regardless of whether the property rights are assigned to the party causing the externality or the affected party.

However, it is important to note that the Coasean solution relies on certain assumptions, such as perfect information, rational behavior, and low transaction costs. In reality, these assumptions may not hold, and government intervention may be necessary to address externalities when private negotiations fail to reach an efficient outcome.