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 would incentivize the party creating the positive externality to continue doing so, as they receive a financial benefit for their actions. This can help offset the high transactions costs associated with negotiating and creating a market for the externality. However, if the external cost is too significant, other alternatives such as a tax or limiting the extent of the externality may also need to be considered.

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