Often parties affected by an externality are unable to reach a private solution due to negotiation and enforcement costs. These costs are known as
A) transaction costs
B) opportunity costs
C) negative externalities
D) transport costs

Question

Quizplus · Accepted Answer

Transaction costs refer to the costs incurred in the process of reaching a private solution in the presence of an externality. These costs include search and information costs, bargaining and decision-making costs, and enforcement costs. As such, option A is the correct answer. Option B (opportunity costs) refers to the cost of choosing one option over another, and is not specific to the issue of externalities. Option C (negative externalities) refers to the harm caused by a particular activity, and is not related to the difficulty of reaching a private solution. Option D (transport costs) refers to the costs of transporting goods from one place to another and is not relevant to the problem of externalities.

Often Parties Affected by an Externality Are Unable to Reach