Transaction costs:
A) are incurred in the production process due to externalities.
B) are eliminated when the government intervenes in a market with externalities.
C) can keep private parties from solving externality problems.
D) increase when taxes are imposed to correct negative externalities.

Question

Quizplus · Accepted Answer

Transaction costs refer to the costs associated with making a trade or exchange. These costs may include search costs, bargaining costs, and enforcement costs. When externalities are present, private parties may face significant transaction costs in attempting to resolve the issue. For example, if a factory is emitting pollution into the air, the affected individuals may need to bear the costs of identifying the source of the pollution, negotiating with the factory to reduce or eliminate emissions, and ensuring that the terms of the agreement are enforced. These transaction costs can make it difficult or even impossible for private parties to effectively address the externality.

Transaction Costs