Question

You are the County Commissioner of Hazard County. Jeb brings a complaint before you that​ Dwight's hog farm is creating a terrible odor.

Your first instinct is to tell the neighbors to work it out among themselves. The (Laffer Curve, Ricardo Conjecture, or Coase Theorem) provides theoretical support for private bargaining as an effective approach to (internalize the extrnality, externalize the surplus, or treat all parties fairy with surplys)

According to this theoretical​ principle, (government intervention, private bargaining, or command and control) will only work as a solution if Jeb (does or does not) have a right to clean air.

You are about to recommend that Jeb and Dwight engage in private bargaining to deal with the externality when twenty of​ Dwight's neighbors also complain that they​ don't like the smell.   

Private bargaining is (more or less) likely to be successful the more parties involved because of (increased transaction costs or decreased transaction costs).

Answer 1

Theoretical Concept for private bargaining is given by coase theorem. In this case private bargaining is a solution to externality in case of properly defined property rights.

The approach aims for internalizing the external cost imposed by the creator of externality.

Government intervention is not required therefore private bargaining will work if property rights are clearly defined with Jeb.

In this case when neighbours are also complaining about the smell the private bargaining is less likely to be successful due to increase transaction cost.