The presence of a negative externality is likely to give rise to significant market failures when: a

Marketing Dec 25, 2020

The presence of a negative externality is likely to give rise to significant market failures when:

a. there are few victims of pollution and few polluters.

b. property rights are not well-defined.

c. transaction costs are relatively low.

d. property rights are well-defined.

Expert Solution

The answer is b).

According to the Coase theorem by Ronald Coase, private parties can make arranges to eliminate externality when property rights are well-defined, because it allows the proper pricing of externality, thereby allowing private parities to internalize the externality. Thus, market failure is likely to arise when property rights are not well-defined.

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