Market failure, Coase theorem, valuation

When markets fail for the environment, economists ask two questions: can bargaining fix it, and how do we value what has no price? The Coase theorem says that with clear property rights and low transaction costs, the parties will bargain to the efficient outcome regardless of who holds the rights. Cost-benefit analysis (CBA) then weighs a project's total gains against its total costs, including environmental ones — which requires valuing clean air, health and nature. Worked example: a factory's pollution causes damage of 100; abatement costs 60. If residents hold the right to clean air, the factory pays up to 100 to pollute but finds abating for 60 cheaper, so it abates. If the factory holds the right to pollute, residents pay up to 100 to stop it and the factory accepts 60-plus — either way, abatement happens.