Question

Suppose Jeremy, Francis, and Andrew are part of Mu Epsilon Nu, a college fraternity known for its very loud, rambunctious weekend parties. The parties annoy many of the residents in nearby apartment complexes due to the loud music and blaring neon lights.This is an example of a(n) _____(A) External cost(B) Positive externality(C) Neither

Answer 1

Answer:

The given situation is an example of an (A) External cost

Explanation:

The Coase theorem is a theorem of economics and law, which states that in presence of an externality, if trade is possible and the transaction costs are low then the bargaining will result in a Pareto efficient outcome, despite of the property's initial allocation.

Therefore, this theorem describes the economic efficiency of an economic outcome in the presence of externalities.

As given, the parties in the college fraternity party is a negative externality as it can impose an external cost to the third party.

Therefore, this is an example of an external cost.