Private solutions to externalities are most effective if ________.
A) the transaction costs associated with bargaining are low
B) the transaction costs associated with bargaining are high
C) property rights are not defined clearly
D) a large number of people are affected by the externalities

Question

Quizplus · Accepted Answer

Private solutions to externalities involve bargaining between parties to come to a mutually beneficial arrangement. If the transaction costs associated with bargaining are low, it is easier for parties to come to an agreement without incurring substantial costs. This makes private solutions more effective. High transaction costs, on the other hand, can make it difficult for parties to come to an agreement, making private solutions less effective. Clear property rights are also important for effective private solutions, but not as critical as low transaction costs. A large number of people affected by externalities may make coordination more difficult, but this factor alone does not determine the effectiveness of private solutions.

Private Solutions to Externalities Are Most Effective If ________