Question

Contributions to charitable organizations are deductible under the federal income tax. In what way does this government policy encourage private solutions to externalities?

Answer 1

we can deduct a maximum of up to 50% of your adjusted gross income for the tax year the donation was given. However, if you give more than 50%, the excess may be carried forward for up to five years.

Private solutions to externalities include moral codes, charities, and business mergers or contracts in the self interest of relevant parties.
The Coase theorem states that when transaction cost are low, two parties will be able to bargain and reach an efficient outcome in the presence of an externality.
In practice, private parties often fail to resolve the problem of externalities on their own.