In perfect competition,environmental externalities need not distort the allocation of resources providing
A)transactions costs are zero.
B)average costs are constant for all output levels.
C)firms install pollution control equipment.
D)the government sets realistic pollution standards.

Question

Quizplus · Accepted Answer

Transactions costs being zero means that there are no costs involved in making an exchange or transaction. In the context of environmental externalities, if transactions costs are zero, it implies that parties can negotiate without cost to internalize the externality, thus potentially leading to an efficient allocation of resources without distortion, according to the Coase Theorem.

In Perfect Competition,environmental Externalities Need Not Distort the Allocation of Resources