Property rights are resources under legal ownership of a party which entitles that party to complete ownership of the resource. According to Richard Posner, within this right exists the notion of exclusivity from which no other party may intrude despite economic or social welfare arguments of compromised efficiency. The nature of property rights fails to ensure protection of third parties due to the inability to adequately define them. As in the example of noise pollution, the concept of assigned ownership for the air above a neighborhood is not easily established, just as an airport cannot claim unique rights allowing jets to fly over the space. Nobody truly owns resources like air, water, and noise pollution and thus raises the question: Without an establishment of property rights for such commodities, how does one determine their cost? The absence of a definition for rights to request abatement of an airport's noise without compensation for such a request represents an example of market failure.
To effectively obtain the most possible satisfaction from the given resources (air, noise pollution) the market must be returned to a state of Pareto optimality. The Coase theorem declares that regardless of initial property rights, contracts have the ability to return balance of rights between two separate parties assuming transaction costs are low. A Pigouvian approach designates a harmer whom is forced to compensate the harmee through government regulations. For the purpose of this paper, however, I will focus on the Coasian framework. According to Coase, the airport and the neighborhood have the ability to rectify their shared market failure by negotiating until their joint utility is maximized. Establishing initial property rights to emit noise to one party over another, within the Coasian framework, impedes the competence of bargaining strategies. .
Within this environment conditions exist that would effect efficiency and perpetuate externalities.
