Question

Ty lives in an apartment building and gets a benefit from playing his stereo. Olivia, who lives next door to Ty and often loses sleep due to the loud music coming from Ty's stereo, bears a cost from the noise. Olivia is threatening to call the police to force Ty to turn down his stereo. Under which of the following conditions would Ty be able to offer Olivia some amount of money to keep her from calling the police and to allow him to continue to play his stereo loudly?a. The Coase Theorem guarantees that Olivia and Ty will always be able to come to an agreement that keeps Olivia from calling the police regardless of the individual benefits and costs.b. The benefit of the music to Ty must exceed the cost of the noise to Olivia.c. The cost of the noise to Olivia must exceed the benefit of the music to Ty by an amount greater than the transaction costs associated with the agreement.d. The cost of the noise to Olivia must exceed the benefit of the music to Ty.

Answer 1

Answer: The answer is b. The benefit of the music to Ty must exceed the cost of the noise to Olivia.

Explanation: According to the Coase Theorem, as long as Ty values his stereo system Olivia will still not get the benefit of the doubt to get her sleep. So Ty has to pay her enough that it would benefit himself and his neighbor Olivia.

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