Given high transactions costs, the best way to deal with a positive externality is
A)To tax it
B)To subsidize it
C)To allow both parties to negotiate
D)To limit the extent of the externality

Question

Quizplus · Accepted Answer

Subsidizing the positive externality is the best choice when there are high transactions costs because it would encourage more individuals or firms to participate in the activity that generates the positive externality. By providing a subsidy, it would lower the overall costs for individuals, making it easier for them to participate and increase the overall quantity of the externality. In this situation, allowing negotiations or limiting the externality may not be as effective in resolving the issue. Taxing the externality would also not be appropriate since it would discourage the activity that generates the positive externality, thus reducing the overall benefits.

Given High Transactions Costs, the Best Way to Deal with a Positive