Final answer:
The Coase Theorem requires low transaction costs and full information about the costs and benefits of the externality for parties to negotiate an efficient outcome. The theorem is grounded in scenarios where property rights are well-defined, but real-world deviations from these ideal conditions often impede its application.
Step-by-step explanation:
For the Coase Theorem to hold, several conditions must be met, but primarily, option D from your list is the correct answer. Specifically, the theorem stipulates that for an efficient outcome to be negotiated without government intervention, transaction costs must be low, and parties involved must have full information about the costs and benefits of the externality.
Ronald Coase illustrated this with the example of a railroad causing damage to a farmer's field through sparks. The central question Coase posed was whether the farmer or the railroad should bear the responsibility for mitigating this externality. The theorem suggests that as long as property rights are well-defined and transaction costs are low, the two parties could reach a mutually beneficial agreement regardless of where the legal liability lies.
However, in the real world, the conditions of the Coase Theorem often do not hold perfectly. Factors such as human self-interest, incentives that lead to negative externalities, and sometimes high transaction and conformity costs can prevent the theorem from being fully realized.