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 are high.

Question

Quizplus · Accepted Answer

Private solutions to externalities are most likely when transactions costs are low and the number of bargaining parties is small. When there are many parties involved in the transaction, it becomes difficult to coordinate and negotiate a solution that everyone agrees to. Similarly, high transactions costs make it expensive and time-consuming to negotiate and enforce agreements. Therefore, when these barriers are low, private solutions such as negotiation, contracts, or insurance can be used to address externalities. Government intervention may not be necessary in this case, as private actors can internalize the costs and benefits of their actions.

Private Solutions to the Problem of Externalities Are Most Likely