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

Answer

(A) In this case, there is negative externality to George and Jane. For George, the negative externality is Opera music but for Jane, the negative externality is Pop music. Each one is creating a negative externality for another person.

(B) The landlord can assign the rights to listen Opera or Pop music. If the George has the right to listen pop music, then Jane has to deal with pop music. On the other hand, if Jane has the right to listen opera, then George has to deal with opera music.

(C) Once, the property rights are defined they are automatically reach an efficient outcome on their own. The one who has the property rights, enjoys the freedom to listen his favourite music while the one who do not have property rights to listen his favourite music, cannot play the music.

(D) Theoretically, Coase theorm solves the problem. But, in reality it is very difficult to assign the property rights in such cases.If the property rights are assigned to George then Jane cannot listen opera music. So, he might shift to some other house. Similary this could happen with George also, if the property rights are assigned to Jane.

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