Question

Suppose that Megan has just finished smoking a cigarette and is thinking about throwing the cigarette butt onto her neighbor Larry's driveway. Although no police officers are around, she instead decides to carry it to a trash can because she doesn't want to embarrass herself by letting people see her littering.

Which of the following types of private solutions to the externality of littering has occurred in this case?

a. Contracts
b. Integration of different types of businesses through merger or acquisition
c. Charities
d. Moral codes and social sanctions

It’s important to note that sometimes private solutions to externalities do not work. For example, this occurs when the number of parties involved is so large that it makes

a. government action the only viable solution
b. coordinating negotiations among all of the parties too costly
c. the market failure from the externality unimportant.

Answer 1

Answer: D. Moral codes and social sanctions

B. coordinating negotiations among all of the parties too costly.

Explanation:

Externality is when the action of a person affects others either in a positive or negative way.

The types of private solutions to the externality of littering that has occurred in this case is moral codes and social sanctions. In this case, Megan doesn't really think that what she wants to do is wrong but she is concerned with how littering would affect her neighbor.

We should note that private solutions to externalities do not work when coordinating negotiations among all of the parties too costly.