Two parties fail to solve an externality problem because reaching an agreement requires high-priced lawyers to negotiate and write up contracts. This illustrates the problem of:
A) Pigouvian legal fees.
B) transaction costs.
C) legal inefficiency.
D) punitive-cost agreements.

Question

Quizplus · Accepted Answer

The situation described in the question, where the parties are unable to reach an agreement due to high costs associated with negotiating and writing contracts, illustrates the concept of transaction costs. These costs can make it difficult for parties to come to an agreement, resulting in market inefficiencies.

Two Parties Fail to Solve an Externality Problem Because Reaching