If only a few people are affected by an externality, then it is likely that
A) corrective taxes will provide the most efficient solution to the externality.
B) command-and-control regulation will provide the most efficient solution to the externality.
C) a private solution to the inefficiency will occur.
D) a private solution will be very difficult to negotiate.

Question

Quizplus · Accepted Answer

When only a few people are affected by an externality, there is less likelihood of free riders and coordination problems that make negotiating a private solution difficult. Therefore, a private solution to the inefficiency is the most likely outcome. Corrective taxes or command-and-control regulations may not be necessary or may cause unnecessary costs in this scenario.

If Only a Few People Are Affected by an Externality