Public regulation is often an effective means of dealing with an externality when
A)property rights are not well- defined
B)transaction costs of private contracts are high
C)private contracts are not Pareto optimal
D)Government officials have superior knowledge

Question

Quizplus · Accepted Answer

When private contracts involve high transaction costs, it becomes difficult for the parties to reach a mutually beneficial agreement to internalize the costs and benefits of the externality. In such cases, public regulation can be an effective means of dealing with the externality. The other options may not necessarily apply in all situations, and thus are not the best choice.

Public Regulation Is Often an Effective Means of Dealing with an Externality