Government intervention is not always necessary to address externalities. Private actors will sometimes arrive at their own solutions.
There are several types of private solutions to market failures:
- Moral codes: Moral codes guide individuals' behavior. Individuals know that certain actions are simply not "the right thing to do" or would elicit disapproving reactions from others. This is illustrated in the case of littering. The likelihood of being fined may be small, but moral codes provide an incentive to refrain from littering.
- Charities: Charities channel donations from private individuals towards fighting to limit behaviors that result in negative externalities or promoting behaviors that generate positive externalities. The former can be seen in the case of organizations that protect the environment, while the latter is exemplified through organizations that raise money for education.
- Business mergers or contracts in the self interest of relevant parties: Two businesses that offer positive externalities to each other can merge or enter into a contract that makes both parties better off .
The Coase theorem, which was developed by Ronald Coase, posits that two parties will be able to bargain with each other to reach an agreement that efficiently addresses externalities. However, the theorem notes several conditions in order for such a solution to occur, including low transaction costs (the costs the parties incur by negotiating and coming to agreement) and well-defined property rights. If the conditions are met, the bargaining parties are expected to reach an agreement where everyone is better off. In practice, however, transaction costs do exist, and the bargaining process does not always run smoothly. As a result, private individuals often fail to resolve problems.