A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate rights to drive during particular times. The most likely reason that this does NOT happen is that:

a. lawyers would find a way to prohibit such negotiations unless they were actively involved, and this would make transaction costs prohibitive.

b. the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.

c. agreements arising from such negotiations could not be enforced since the Constitution guarantees all individuals freedom of access to all public roads.

d. most individuals are unfamiliar with the Coase theorem.

Question

Gretchen Reid

Social Studies

13 March, 13:00

A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate rights to drive during particular times. The most likely reason that this does NOT happen is that:

a. lawyers would find a way to prohibit such negotiations unless they were actively involved, and this would make transaction costs prohibitive.

b. the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.

c. agreements arising from such negotiations could not be enforced since the Constitution guarantees all individuals freedom of access to all public roads.

d. most individuals are unfamiliar with the Coase theorem.

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Answers (1)

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Milton Leon · Answer 1

Answer: the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.

Explanation: permitting drivers to negotiate rights to drive during particular times is not impossible but will be highly expensive. Using the cost benefit analysis, this event will be highly discouraged.