Transaction costs
A)can keep private parties from solving externality problems.
B)are incurred in the production process due to externalities.
C)increase when taxes are imposed to correct negative externalities.
D)are eliminated when the government intervenes in a market with externalities.

Question

Quizplus · Accepted Answer

Transaction costs refer to the costs incurred in the process of making an exchange or completing a transaction. In the context of externalities, private parties may not be able to negotiate and reach an agreement due to high transaction costs, which can hinder market-based solutions to externalities. Government intervention can help to lower transaction costs and facilitate a resolution to the externality problem. Therefore, option D is not correct. Option B is incorrect because transaction costs are not incurred due to externalities but rather the process of making a transaction. Option C is also incorrect since taxes can either increase or decrease transaction costs, depending on the specific circumstances.

Transaction Costs