Asked by Muhammad Haque on May 28, 2024
Verified
A familiar example of a negative externality is loud music on a college campus.In principle,it should be possible to internalize this externality by permitting students to negotiate rights to play music during particular times.The most likely reason that these negotiations do NOT happen is that:
A) most students are unfamiliar with the Coase theorem.
B) the transaction costs associated with identifying and establishing communication with students would be high.
C) music is an experience,not a good.
D) some students don't view loud music as a negative externality.
Coase Theorem
A legal and economic theory stating that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.
Transaction Costs
The expenses incurred when buying or selling a good or service, which can include search, bargaining, and enforcement costs.
- Examine the effects that transaction costs have on reaching effective resolutions for issues related to externalities.
Verified Answer
MM
Michael MisabiroMay 28, 2024
Final Answer :
B
Explanation :
The transaction costs associated with identifying and establishing communication with students would be high. This means that the costs of negotiating and enforcing such agreements would be too high for the benefit gained, making it unlikely that students would engage in such negotiations, even if they were aware of the concept of externalities and the Coase theorem.
Learning Objectives
- Examine the effects that transaction costs have on reaching effective resolutions for issues related to externalities.