Knowing that the presence of externalities reduces surplus,it implies that:
A) there are mutually beneficial trades waiting to be exploited so private parties have an incentive to solve the externality problem themselves.
B) government needs to find them and correct the market.
C) there are mutually beneficial trades waiting to be exploited, so government has an incentive to force those parties to solve the problem themselves.
D) None of these statements is true.

Question

Quizplus · Accepted Answer

Externalities cause market failures by preventing mutually beneficial trades, so private parties may have an incentive to negotiate solutions to internalize the externality, as suggested by the Coase theorem.

Knowing That the Presence of Externalities Reduces Surplus,it Implies That