The presence of a negative externality is likely to give rise to significant market failures when:
A)property rights are not well-defined.
B)property rights are well-defined.
C)there are few victims of pollution and few polluters.
D)transaction costs are relatively low.

Question

The presence of a negative externality is likely to give rise to significant market failures when:
A)​property rights are not well-defined.
B)​property rights are well-defined.
C)​there are few victims of pollution and few polluters.
D)​transaction costs are relatively low.

Quizplus · Accepted Answer

When property rights are not well-defined, it is difficult to assign responsibility for the negative externality and therefore market mechanisms may not be effective in addressing the problem. This can lead to significant market failures. When property rights are well-defined, it is easier to assign responsibility and implement mechanisms such as taxes or regulations to correct for negative externalities. The number of victims and polluters as well as transaction costs may also impact the severity of market failures, but they are not as critical as the definition of property rights.

The Presence of a Negative Externality Is Likely to Give