Final answer:
Better-defined property rights incentivize firms to minimize external costs like pollution by clearly assigning responsibility and encouraging negotiation between affected parties to find effective solutions.
Step-by-step explanation:
Better-defined property rights are crucial for setting a balance between economic activities and the impact they have on the environment, such as pollution. The question of who should bear the responsibility to prevent damages caused by externalities like pollution is central to this concept. Economist Ronald Coase provided an illustrative example with a railroad and a farmer's field. If a railroad causes sparks that set a field on fire, should it be the responsibility of the farmer to protect his property, or should the railroad company be required to prevent the sparks? Coase's point suggests that when property rights are well-defined, parties have an incentive to negotiate the allocation of these external costs and find the most efficient solution that minimizes harm.
The correct answer to the given question about the incentive provided by better-defined property rights to account for external costs is option b. This states that better-defined property rights restrict firms from polluting, providing them with an incentive to reduce external costs. By clearly defining property rights, firms are more likely to internalize the externality, because they either bear the cost of damage to others or need to negotiate with property owners to come to an agreement on how to resolve the issue.