Question

Rod owns a dog whose barking annoys Rod's neighbour Jane. Suppose that the benefit of owning the dog is worth $500 to Rod and that Jane bears a coast of $700 from the barking. Assuming Rod has the legal right to keep the dog, what is a possible private solution to this problem?a. Jane pays Rod $499 to get rid of the dogb. Rod pays Jane $650 for her inconveniencec. Jane pays Rod $650 to get rid of the dogd. There is no private solution that would improve this situation

Answer 1

The correct option is (c)

Step-by-step explanation:

Solution to this problem is well defined by economist Ronald Coase in his theorem 'Coase theorem' that states issues between parties can be addressed privately and can come up with an economically viable solution whereby both the parties are satisfied.

In the current situation, barking dog is causing Jane a cost of $700 but Rod benefits by keeping a dog that is worth $500. Rod will not accept a solution that would give her benefit below $500 and Jane will not accept anything that will be less than the cost she is bearing currently.

The best solution is Jane paying $650 to Rod for getting rid of it. In this case, Rod receives a benefit more than what she is getting now and Jane's cost is less than what she is bearing currently.