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?

Question

Skyler

Business

12 February, 15:29

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?

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Payton Horn · Answer 1

It describes the problem of transaction costs and negotiation.

Explanation:

Externalities are situations that arise when the activities of an organization affects another for good or bad, but with the first organization that caused the change, receiving no benefits (if it was a positive change), or bearing no costs (if it as a negative change).

Ronald Coase proposed some theories about the possible solutions to externalities. One of them is negotiation between the two parties involved. The problem with this solution is the high costs of transaction that could be spent before an agreement is reached. The number of people involved in the negotiation could also be a problem.