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Homework answers / question archive / The presence of a negative externality is likely to give rise to significant market failures when: a
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.
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.
