If the costs of negotiation are small but not negligible,
A)the best available outcome results if the liability is placed on the party with the lowest cost of prevention.
B)an efficient outcome results no matter how the law assigns responsibility.
C)efficiency cannot be reached without government intervention.
D)the best way to deal with the externality is to tax it.

Question

Quizplus · Accepted Answer

When negotiation costs are small, assigning liability to the party with the lowest cost of prevention ensures an efficient outcome without the need for government intervention. This is because the party with the lowest cost will take preventive measures to avoid the externality and thus achieve an efficient outcome. Therefore, option A is the best choice.

If the Costs of Negotiation Are Small but Not Negligible