Question

Monty and Ariana are neighbours: Monty owns a dog named Fido. Fido barks and disturbs Ariana. a. Define the Coase Theorem. b. Monty gets a $500 benefit from the dog and Ariana bears an $800 cost from the dog's barking, Can Monty and Ariana reach a solution from private bargaining? Is this solution an efficient outcome! c. Monty gets S1000 benefit from the dog and Ariana bears an $800 cost from the dog's barking, Can Monty and Ariana reach a solution from private bargaining? Is this solution an efficient Bancome d. If there are other 20 people who live on the same street as Monty and Ariana and some of them also did not like Fido, will the solution reached in parts and change? 2 B 1 Previous path DOLL

Answer 1

A. Coase Theorem states that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided. Further, the Coase Theorem asserts that if conflict arises over property rights under these assumptions, then parties will tend to settle on the efficient set of inputs and output.

B. Yes Monty and Ariana can find a solution through private bargaining. The solution is for Ariana to pay monty $500 to not have the dog. Here Monty will get the same benefit as having the dog, while Ariana would have paid less than the cost of 800 she was having to incur because of the dog.

Yes the outcome is efficient because both parties are better off now.

C. No they cant reach a solution from private bargaining now. Monty will give up the dog only if he gets at least $1000, cause thats his benefit from the dog. Ariana wont pay $1000 as her cost from the dog is only $800, and thats the maximum amount she will be willing to pay.

Of course, the solution is not optimal.

D. Yes the solutions will change. In case of part B, the other people and Ariana will pool money in such a way that they will give Monty a total of 500, with each contributing equally.

In case of part C, they will pay Monty 1000, with each contributing equally (as long as the cost is not higher than 800 per person, which it wont be cause even if there is only one more person, the cost for Ariana and that person will be 1000/2=500).

So if there are more persons we have a efficient solution in both cases.