Question 3 George and Jane are next-door neighbours. George likes listening to p

Question

Question 3

George and Jane are next-door neighbours. George likes listening to pop music at high volume but hates opera. Jane likes listening to opera at high volume but hates pop music.

a) What is the externality in the above case? (6 marks)

b) Both George and Jane complain about their neighbour to the landlord. What kind of ‘regulation’ can the landlord implement to solve the problem? Is this direct regulation efficient? Explain your answer. (8 marks)

c) According to the Coase theorem, how might George and Jane reach an efficient outcome on their own? (10 marks)

d) Why might the Coase theorem not work in reality? (4 marks)

Explanation / Answer

a.

Loud music is negative externality. The usage of one person is hurting the other.

b.

The land lord could do is to warn the tenant and ask him/her to take measures not to disturb the neighbours. This could sometime turn efficient if they respond positively to the advise.

c.

Coase theorem implies that the effecient outcome can be attained by bargaining. So, both should sit and bargain for optimal outcome.

d.

Bargaining is not posible in all cases, the personality and interest plays a vital role and hence it is not practically possible.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.