Final answer:
The Coase Theorem posits that with well-defined property rights, no transaction costs, and full information, bargaining will lead to efficient outcomes irrespective of the initial property rights allocation. However, in reality, these assumptions often do not hold true, thus limiting the theorem's practical applicability.
Step-by-step explanation:
Coase Theorem and Its Major Assumptions
The Coase Theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. The theorem assumes that property rights are well-defined, that the involved parties can negotiate without cost, and that they have full information about the costs and benefits involved. These assumptions are crucial for the theorem to hold because they ensure that the involved parties can find and agree upon a solution that maximizes welfare.
In the real world, these assumptions are seldom fully met. Transaction costs are rarely zero - it often costs money and time to negotiate and enforce agreements. Property rights may not be perfectly defined or protected, and parties may not have full information, leading to inefficiencies. Thus, while the Coase Theorem provides a benchmark for economic efficiency, its applicability in the real world is limited by the validity of its assumptions.