Question Details

Question 3

George and Jane are next-door neighbours. George likes listeningto pop music at high volume but hates opera. Jane likes listeningto 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 thelandlord. What kind of ‘regulation’ can the landlord implement tosolve the problem? Is this direct regulation efficient? Explainyour answer. (8 marks)

c) According to the Coase theorem, how might George and Janereach an efficient outcome on their own? (10 marks)

d) Why might the Coase theorem not work in reality?