Chapter 74, Problem 4MCQ

To determine

Through which the externalities can be dealt with inefficiencies created by externalities, under the right circumstances.

Answer to Problem 4MCQ

From the available options, the correct option is private bargaining.

Explanation of Solution

Under the right circumstances, according to the Coase theorem, the externalities can be dealt with inefficiencies created by externalities through private bargaining because it could be a substitute for legal liability support to sort out the conflict through the efforts to avoid any kind of harmful behavior by compensating the harmed party. Therefore, private bargaining can provide the best outcome to deal with these inefficiencies. However, lawsuits can only help to avoid conflicts of which related to property rights, or negotiation. Mediation involves a mediator solving a problem between two or three persons for the negotiation as they do not deliver the appropriate outcome. Vigilante actions only consider people who protect their community by organizing themselves into any unofficial group. And, government policies provide only guidelines or rules but there is not much competition to deal with inefficiencies to sort them out.

Therefore, the correct option is b (private bargaining).

Economics Concept Introduction

Introduction: Externality problems refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market.