Externalities between two firms can be "internalized" if:
I.The two firms merge.
II.Bargaining costs are zero.
III.The externalities affect each firm equally.
IV.Marginal costs for both firms are constant.
Which statement(s)correctly complete(s)the sentence?

Question

Quizplus · Accepted Answer

Option I and II are correct, as a merger can internalize externalities, and zero bargaining costs can also internalize the externalities. However, statement III is incorrect because externalities may affect each firm differently. Statement IV is also incorrect since constant marginal costs do not guarantee internalization of externalities.

Externalities Between Two Firms Can Be "Internalized" If