Question

It’s important to note that sometimes private solutions to externalities do not work. For example, this occurs when an excessive amount of time or money must be spent for parties to reach an agreement. This describes the problem of ______________.

Answer 1

Answer: Transaction Costs.

Explanation:

In Economics, it is believed that indeed Private parties can solve an externality amongst themselves without the need for Government intervention. This is what the Coase Theorem posits. However the theorem believes that for this to happen, there has to be low to zero transaction costs.

If there are high transaction costs then, the theorem is not expected to hold as is the case in the text. When Transaction Costs are high, Private solutions to Externalities have a lower chance of working and this is usually the reality.