Consider the following scenario:

Suppose that a flower nursery benefits from having a butterfly farm located only a few miles away, because the presence of the insects greatly improves flower pollination. Lawyers for the two companies meet to draft a legal document specifying the number of butterflies the farm promises to maintain in exchange for payments to be made by the nursery.

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

Charities

Moral codes and social sanctions

Integration of different types of businesses

Contracts

It’s important to note that sometimes private solutions to externalities do not work. For example, this occurs when communications barriers or social customs are important enough relative to the potential gains involved that

(A) the government must step in
(B) the private solution is not feasible
(C) The market system has a crisis

1) Contract---d 2) the private solution is not feasibleB

Explanation:

1) The private solution to the externality of pollination is a Contract  because it is  mentioned that both the parties signed a legal document in the presence of lawyers with specification on the payment terms. Contracts join parties to their stated responsibilities by using a clear language so as to enable each party understand its responsibilities involved in a deal especially in terms of payment and deadlines and becausen and also in the sense that  If one party fails to  honor a part of their agreement, they have breached the contract, which can be a cause for  legal action thereby providing an insurance policy to protect both parties.

2 )Sometimes private solutions to externalities do not work especially  when communications barriers or social customs are important enough relative to the potential gains involved that the private solution is not feasible because according to the  Coase  theorem which  states that private individuals can only  resolve the problems caused by externalites on their own  only when the interested parties  can bargain without cost over the allocation of resources When this happens,  then the private market will help solve the problem of externalities and allocate resources efficiently.

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