If only a few people are affected by an externality, then it is likely that:
A)Pigovian taxes will provide the most efficient solution to the externality
B)command-and-control regulation will provide the most efficient solution to the externality
C)a private solution to the inefficiency will occur
D)a private solution will be very difficult to negotiate

Question

Quizplus · Accepted Answer

If only a few people are affected by an externality, it is likely that a private solution to the inefficiency will occur. This is because the transaction costs of negotiating a private solution will be lower since there are fewer parties involved. Therefore, the affected parties will be more likely to engage in negotiations to find a mutually beneficial solution. Pigovian taxes and command-and-control regulation may be too costly or difficult to implement in such a situation. A private solution may involve bargaining between the parties affected or the creation of a property rights system to internalize the externality.

If Only a Few People Are Affected by an Externality