8. Ringo loves playing rock \'n\' roll music at high volume. Luciano loves opera
ID: 1229935 • Letter: 8
Question
8. Ringo loves playing rock 'n' roll music at high volume. Luciano loves opera and hates rock 'n' roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.a. What is the externality here?
b. What command-and-control might the landloard impose? Could such a policy lead to an inefficient outcome?
c. Suppose the landloard lets the tenants do whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?
Explanation / Answer
a) The (negative) externality here is the noise in the neighbor's apartment that spills over from the others rock-n-roll/opera music b) The landlord could impose a "no loud music policy" and penalize violations. This could be an inefficient outcome if there were a way for the two parties to come to some kind of agreement on the issue without an outright ban on loud music c) Ringo and Luciano could agree to listen to their loud music only at certain times of day (preferably when the other isn't home), or alternate days. Furthermore, either Ringo or Luciano could pay the other for the right to play the music loudly, or to pay the other not to play their music loudly. In the absence of transaction costs, bargaining will create an efficient outcome (likely more efficient than one imposed by the landlord). Transaction costs would prevent them from reaching an efficient outcome. An example of this would be if Luciano didn't trust the Ringo and visa-versa and they had to implement expensive and time consuming enforcement mechanisms to manage their agreement, or if they were particularly stubborn and it took a lot of time consuming negotiations for them to reach an agreement in the first place.
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