he Coase theorem will apply only if the amount of compensation that must be made to the damaged party is small. an individual who is not affected by the externality can negotiate a settlement between the parties imposing the externality and the parties that are harmed by the externality. the courts can be used to determine the amount of compensation that must be made to the damaged party. the number of people involved is small.

the number of people involved is small.

Explanation:

Coase theorem was developed in 1960 by a British economist and author named Ronald Coase.

Coase theorem states that when the actions of a party (X) negatively affects or harm another party (Y), then party Y should be able to create an incentive for party X to stop or limit the action creating such harm.

Generally, when transaction cost are low, the two parties are able to bargain and reach a mutual agreement in the presence of an externality such as a pollution.

The Coase theorem will apply only if the number of people involved is small, the cost of negotiation is low and there are well defined property rights.

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