Private solutions to the problem of externalities are most likely when
A) government actively encourages these solutions.
B) transaction costs are low and the number of bargaining parties is small.
C) transaction costs are low and the number of bargaining parties is large.
D) transaction costs are low and the monetary damages to third parties is high.

Question

Quizplus · Accepted Answer

Private solutions to externalities are likely to occur when transaction costs are low and the number of bargaining parties is small. If the number of parties is large or the transaction costs are high, then it becomes difficult to negotiate and reach agreements. In such cases, government intervention may be needed to regulate the activity causing the externality. If the monetary damages to third parties are high, then the parties involved may still not have enough incentive to reach a private solution.

Private Solutions to the Problem of Externalities Are Most Likely