Your roommate has the right to play her harmonica during the day. But you find the best time to study is during the day, and the harmonica playing makes it hard for you to concentrate. You tell your roommate that you will do her laundry every week if she does not play the harmonica during the day and she agrees to this. This is an example of

A) the drop-in-the-bucket problem.
B) liability rules.
C) the Coase theorem.
D) an injunction.

This scenario exemplifies the Coase theorem, which suggests 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. Here, you and your roommate negotiate a mutually beneficial agreement (you doing her laundry in exchange for her not playing the harmonica during the day), demonstrating how private parties can resolve conflicts over externalities (in this case, noise) through negotiation.