Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 4 The Economics of the Public Sector
Chapter 10 of 36 Externalities
Section 17 of 18
…
The Coase theorem states the private market in some cases can deal with externalities effectively.
If private parties can bargain over the allocation of resources at no cost the private market, they will solve the problem of externalities and allocate resources efficiently.
…
Suppose Dick owns a dog “Bud.”
Bud barks and disturbs neighbor Jane.
Dick benefits from owning the dog but it imposes a negative externality on Jane.
There are two possible outcomes
· Dick gives up Bud
· Jane continues to suffer from the noise of Bud's barking
…
A social planner considering the two alternatives would compare the benefit Dick gets from the dog to the cost Jane bears from the barking.
If the benefit exceeds the cost it is efficient for Dick to keep the dog and Jane to endure the barking.
If Jane’s cost exceeds Dick’s benefit he must get rid of the dog.
…
According to the Coase theorem, the private market can on its own reach the efficient outcome.
Jane can offer to pay Dick to get rid of Bud, and refrain from keeping any other noisy dog.
Dick accepts the deal if the money offered is greater than his benefit of keeping a dog.
…
Suppose Dick gets a $500 benefit from the dog and Jane bears an $800 cost from the barking.
Jane can offer Dick $600 to get rid of the dog, and Dick will accept.
Both parties are then better off, and an efficient outcome is reached.
…
It’s possible Jane would not be willing to offer any acceptable price to Dick.
Suppose Dick gets a $1,000 benefit from the dog and Jane bears an $800 cost from the barking.
Dick would turn down any offer below $1,000.
Jane would not offer any amount above $800.
Dick ends up keeping the dog.
Given these costs and benefits this outcome is efficient
…
The Coase theorem says
Private economic actors can often solve the problem of externalities among themselves.
Whatever the initial distribution of rights, the interested parties can always reach a bargain where everyone is better off and the outcome is efficient.
… …
they can negotiate
karera wa kōshō dekiru
彼らは交渉できる

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