Question

Bruno loves 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? D. What Command-and - control policy might the landlord impose? Could such a policy lead to an inefficient outcome? C. Suppose the landlord lets the tenant 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 Bruno 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 he Bruno will pay him to play the music. the money that is paid here, irrespective of the parties, can be usd to build sound proof wall.