"suppose that factories in chicago, illinois, and gary, indiana, produce pollution that affects people living in western michigan. even though the polluting plants and affected individuals can be identified, the externality cannot be resolved privately because of the large number of polluters and affected individuals. this is an example of what type of problem? "

I believe the answer is: transaction costs and negotiating problems.

Transaction cost refers to additional expenses that incurred when we buy or sell a certain goods or services, this could includes things such as unexpected transportation charge, environmental damage, or intermediary charges. Negotiating problems refers to a conflict that might arise between the sellers and the buyers before both of them agree on the term of transaction.

i am confused, what is the question? i can you out if you put it into more depth.