Suppose Fred imposes negative externalities on Wilma when he engages in some otherwise productive activity (like yelling “Yabba Dabba Doo!” to encourage himself, for instance). Suppose further that Fred and Wilma know each other well, communicate effectively and trust each other, and generally have low costs from transacting with each other. In this setting, having the government impose a Pigouvian tax on Fred each time he yells “Yabba Dabba Doo!” is the only way to generate socially optimal levels of yelling.

Indicate whether each statement is true or false, and justify your answer.