Market Responses to Externalities market always fail to provide an etricient output level presence of externalities? just as pure public doods will something be provided at efficient or nearly efficient, levels through voluntary private agreement within intermediate groups, so too may private actions counter the inefficiency associ ed out by Ronald The a seminal artic Coase will lead to an economically efficient level Of course, the benefits resulting from the bargaining who owns the property rights. tion of Coase's model that limits its applicability to many actual ations Namely, Coase assumes zero transaction costs in the exercise of property rights, in many real-world situations, transaction costs are high usually because those producing and experiencing the externality are numerous. With im the outcome becomes possible because of the high costs of coordination in the face of opportunities for ride. Nevertheless, Coase's insight is valuable. He pointed out that in the case of small numbers (he assumes one source and one recipient of location of property rights alone would lead to a negotiated (that is, private) out arties. Assuming that individuals make decisions based on the dollar value rather than the utility value of external effects, efficiency results whether a complete prop- erty right is given to the externality generator (one bears no liability for damages caused by one's externality) or to the recipient of the externality (one bears full li- ability for damages caused by one's externality). Either rule should lead to a bar- gain being reached at the same level of externality, only the distribution of wealth will vary, depending on which rule has force. Assuming that individuals maximize utility rather than net wealth, however, opens the possibility for different allocations under different property rights assignments 22 A moment's thought should suggest why large numbers will make a Coasian solution unlikely. Bargaining would have to involve many parties, some of whom would have an incentive to engage in strategic behavior. For example, in the case of a polluter with no liability for damages, those experiencing the pollution may fear free riding by others. In addition, firms may engage in opportunistic behavior, threatening to generate more pollution to induce payments. Under full liability, in- dividuals would have an incentive to overstate the harm they suffer.