Question

According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the _____ is (are) relatively low.
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:

Classify each scenario according to whether or not it is a potential way to internalize the externality.

Answer 1

Answer:

Private parties can negotiate to an efficient solution in the presence of externalities if the transaction costs is (are) relatively low.

Potential way to internalise externality : Including negative externality price in party tickets & using it for -  better sound development , compensating residents for a negative effect to them

Explanation:

Coase Theorem states that two parties can bargain & reach at a socially efficient outcome, internalising negative externality impact - if the transaction cost is low.

Eg : A neighbouring farm & ranch, where Ranch's cattle wander & destroy farm's crops. It would be efficient to solution to draw a fence around the farm, contributed by the rancher also

In this case : Noise negative externality can be internalised by :

• Including the externality valuation as increased price in the party tickets
• Using the surplus collected money to internalise externality - for  :  

- Noise solving ways, eg headphones dj & sound proof venue development

- Compensating nearby locality for the adverse effect on them