If two parties negotiating a private solution to an externality cost employ a lawyer to help draft the contract, the lawyer's costs are a type of:
A)transport cost
B)legal cost
C)negative consumption externality
D)a transaction cost

Question

Quizplus · Accepted Answer

The lawyer's costs are a type of transaction cost, which is a cost incurred in making an economic transaction. In this case, the two parties are negotiating a private solution to an externality cost, and the lawyer's services are necessary to draft the contract that will govern the terms of the agreement. The lawyer's fees are an example of a transaction cost that must be taken into account when calculating the overall costs of the agreement.

If Two Parties Negotiating a Private Solution to an Externality