Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Question

Quizplus · Accepted Answer

Private parties may find the costs of negotiating a solution to an externality (such as legal fees, enforcement costs, and information costs) to be higher than the benefits of solving the problem, leading them to not address the externality. This concept is discussed in the Coase Theorem, which suggests that if transaction costs are low, parties can negotiate solutions to externalities on their own, but high transaction costs can prevent these negotiations from occurring.

Private Parties May Choose Not to Solve an Externality Problem