Final answer:
The Coase theorem states that if transaction costs are low and property rights are clearly defined, externalities can be efficiently managed through private transactions, leading to efficient outcomes without deadweight losses. Hence, the correct answer is that private transactions are efficient (C).
Step-by-step explanation:
According to the Coase theorem, when transaction costs are low and property rights are clearly defined, externalities like pollution can be dealt with efficiently through private transactions. The parties involved can negotiate without the need for governmental intervention, as long as the assignment of property rights is clear and bargaining costs are negligible. This results in private transactions being efficient, as the involved parties will naturally work towards an outcome that maximizes their joint benefit. In the case of the railroad and the farmer, either solution to the problem of sparks (building a tall fence or fitting a gadget to the smokestack) could be efficient, depending on who holds the property rights and how the parties negotiate.
However, this theorem does not stipulate that all negative or positive externalities in themselves cause deadweight losses, nor does it suggest that public transactions are necessarily efficient, nor that the efficient level of pollution will be zero. Deadweight losses occur when markets fail to allocate resources efficiently typically due to externalities or other market failures. In an efficient market under the Coase theorem, externalities are internalized by the parties involved, leading to a socially optimal level of output and no deadweight loss.
Therefore, the correct option in the context of the Coase theorem, when transaction costs are low and property rights are clear, is that private transactions are efficient (C).