Final answer:
Transaction costs include time, effort, and resources needed to reach an agreement, which can hinder efforts to internalize externalities. Imperfect and asymmetric information complicates transactions by affecting price and quantity. The more complex and numerous the parties involved, the higher the transaction costs.
Step-by-step explanation:
Transaction costs can significantly impede the efficiency of deals intended to internalize externalities. These costs are the time, effort, and other resources that are necessary to reach an agreement between parties. When it comes to environmental issues, transaction costs might include the difficulty of measuring the true cost to nature, leading to disagreements over the valuation of these externalities.
Moreover, the presence of imperfect information and asymmetric information can further complicate transactions, as buyers or sellers may have incomplete or disproportionate knowledge about the transaction's components. This lack of perfect information can hinder price determination and the quantity of products sold, even though parties may strive to develop mechanisms to overcome this barrier.
Additionally, the number of people involved and the complexity of the decision can escalate transaction costs. This makes decision-making more laborious and could lead to inefficient outcomes or even prevent mutually beneficial transactions from taking place. Recognizing these costs is crucial in understanding why markets sometimes fail to efficiently address externalities on their own.