A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate rights to drive during particular times. The most likely reason that this does NOT happen is that:
A) most individuals are unfamiliar with the Coase theorem.
B) the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.
C) agreements arising from such negotiations could not be enforced, since the Constitution guarantees all individuals freedom of access to all public roads.
D) lawyers would find a way to prohibit such negotiations unless they were actively involved, and this would make transaction costs prohibitive.

Question

Quizplus · Accepted Answer

The transaction costs of organizing and negotiating among all drivers would be too high, making it impractical to internalize the externality through individual negotiations.

A Familiar Example of a Negative Externality Is Traffic Congestion