Which of the following statements is true in relation to externalities I. property rights and low negotiation costs will allow the private market system to operate at socially optimum level. II. government regulations limit activities with negative externalities III. taxes are placed on activities that have negative externalities and subsidies on activities will positive externalities

Externality is when the production or consumption activity of a person has an unintended effect on a third party that is not part of the economic activity.

Externality can be positive or negative.

Positive externality is when the benefits of economic activities to third parties exceeds the costs. Examples of activities that yields postive externality are research and development and education. Activities that produce postive externality are usually under produced in the economy. So the government can encourage production of goods with positive externality by giving subsidy.

Negative externality is when the benefits of economic activities to third parties is less than the cost. Activities that generate negative externality are over produced in an economy. Government can discourage activities that produce negative externality by taxing such activity. Taxing increases the price of the activity and discourages production.

The governments regulation can reduce negative externality.

The coase theorem states that if externality exists and there's no or little transaction costs, bargaining among private individuals or firms would lead to an efficient outcome.

When property rights are clearly defined ,it can reduce the amount of externality and leads to a socially efficient outcome.

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