Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality ?
Correct answer: B. costs incurred to reduce the pollution
- A. costs incurred due to lawyers' fees
- B. costs incurred to reduce the pollution
- C. costs incurred to enforce the agreement
- D. costs incurred due to a large number of parties affected by the externality
- E. All of these answers are considered transaction costs
Explanation
The cost of reducing pollution is an abatement cost, not a transaction cost of reaching and enforcing an agreement. Lawyers' fees, enforcement expenses, and the difficulty of negotiating among many affected parties are transaction costs.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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