Private solutions to externalities are MOST likely to occur when there are:
A) well-defined property rights and low transaction costs.
B) communal property rights and large numbers of sellers.
C) private property rights and high transaction costs.
D) communal property rights and large numbers of buyers and sellers with equal bargaining power.

Question

Quizplus · Accepted Answer

Well-defined property rights ensure that individuals are aware of their rights and responsibilities regarding their property, which makes it easier to negotiate private solutions to externalities. Low transaction costs make it less costly for individuals to reach and maintain agreements, which further facilitates private solutions. Communal property rights (option B and D) tend to lead to the tragedy of the commons, making it difficult to negotiate private solutions. High transaction costs (option C) make it more expensive for individuals to reach and maintain agreements, which also makes it less likely for private solutions to occur.

Private Solutions to Externalities Are MOST Likely to Occur When