Private solutions to the problem of externalities are most likely when
A)government actively encourages these solutions.
B)transactions costs are low and the number of bargaining parties is small.
C)transactions costs are low and the number of bargaining parties is large.
D)transactions costs are low and the monetary damages to third parties is high.

Question

Quizplus · Accepted Answer

Private solutions to the problem of externalities are most likely when transactions costs are low and the number of bargaining parties is small. When there are only a few parties involved and the cost of negotiating and reaching an agreement is low, it becomes easier for them to reach an agreement that benefits all parties involved. In such situations, private individuals or companies can negotiate, bargain and arrive at mutually agreeable arrangements for addressing externalities without the need for government intervention. However, if the cost of negotiating such arrangements is high, or the number of parties involved is large, it becomes difficult for private parties to coordinate and arrive at an agreement. In such cases, government intervention may be necessary to address the problem of externalities.

Private Solutions to the Problem of Externalities Are Most Likely