Final answer:
An arm's-length transaction ensures that parties are dealing from equal positions, without favoritism or obligation beyond the transaction itself. It is a market exchange defined by self-interest, which contrasts with transactions involving reciprocity that promote social well-being.
Step-by-step explanation:
An arm's-length transaction is a situation where the parties involved conduct negotiations on an equal footing, without one party having an advantage over the other due to a pre-existing relationship or insider knowledge.
They owe each other no special duties, and their goal is generally to look out for their own best interests.
Contrary to the student's assertion, the parties in an arm's-length transaction are not ignoring their own best interests; rather, they engage in market exchange motivated by self-interest, which is the basis for most market transactions.
Market transactions allow participants to walk away without future obligations, which can be advantageous for efficiency and simplicity.
However, this may also be a disadvantage as it fosters an environment driven by self-interest and greed, lacking in mutual trust and reciprocity, which are necessary for cooperation and social well-being.
An arm's-length transaction, by its nature, is designed to avoid any appearance of favoritism that could arise from special duties between parties.