A Familiar Example of a Negative Externality Is Traffic Congestion

question 177

Multiple Choice

A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate rights to drive during particular times. The most likely reason that this does NOT happen is that:

• A) most individuals are unfamiliar with the Coase theorem.
• B) the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.
• C) agreements arising from such negotiations could not be enforced, since the Constitution guarantees all individuals freedom of access to all public roads.
• D) lawyers would find a way to prohibit such negotiations unless they were actively involved, and this would make transaction costs prohibitive.

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Definitions:

Conditioned Stimulus

An initially neutral stimulus that becomes associated with an unconditioned stimulus to elicit a conditioned response after repeated pairings.

Conditioned Response

a learned response to a previously neutral stimulus that has become associated with an unconditioned stimulus.

Noise

Unwanted or disturbing sound that interferes with or diminishes clarity of auditory signals.

Eye Blink

A rapid closing and opening of the eyelid which is a reflex reaction to protect the eye from foreign bodies or bright lights and to lubricate the eyeball.