If private bargaining to resolve an externality is to result in an efficient outcome,

If private bargaining to resolve an externality is to result in an efficient outcome,

the initial assignment of rights must be clear to both parties.

there must be direct regulation of externalities.

there must be tradable pollution rights.

rights must be protected by liability rules.

Answer

the initial assignment of rights must be clear to both parties.

If private bargaining to resolve an externality is to result in an efficient outcome, the initial assignment of rights must be clear to both parties.

Explanation

It is rather clear that the property rights and their content must be perfectly defined, all goods have to have known owner as well as being clear what exactly the protection of property includes to both parties although it is understood that private bargaining does not work, the government can sometimes play. The reason behind all this is the simple fact that private individuals on their own often fail to resolve the problems caused by externalities and this is why if private bargaining to resolve an externality is to result in an efficient outcome, the initial assignment of rights must be clear to both parties.