Private parties may choose to leave an externality problem unsolved if the transaction costs are large enough.

Question

Quizplus · Accepted Answer

If the transaction costs of finding a solution to an externality problem are too high, private parties may not find it cost-effective to pursue a solution and may choose to leave the problem unsolved. This is because the costs of negotiating and enforcing a solution may outweigh the benefits of solving the externality.

Private Parties May Choose to Leave an Externality Problem Unsolved