Answer to Question #297136 in Microeconomics for afsane

Question

playing rock ‘n’ roll music at high volume. Placido 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 policy might the landlord impose? Could such a policy lead to an inefficient outcome? c. Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, How might Bruno and Placido reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?

Answer 1

a) The externality is the loud music.

b)The landlord might impose a regulation on the building stating that nobody can play loud music. This is not an inefficient outcome as the externality is removed.

c) If the tenant has the property rights ( right to play music) then Placido will pay him to not play the music. If Placido has the property rights, then the tenant will pay him to play the music. the money that is paid here, irrespective of the parties, can be used to build sound proof wall. An externality arises when a person engages in an activity that affects the well-being of others, either positively or negatively, for which he is not compensated for nor pays the price. Externality can be either positive or negative. If the impact on the other individuals is positive, it is a positive externality. If the impact of the activity on the other individuals is negative, it is called negative externality.