Final answer:
In the dispute between Tom and Jerry over their ice cream business profits, arbitration could provide resolution by examining property rights and legal responsibilities as indicated by Coase's theory, leading to a compromise that serves the best interests of the business.
Step-by-step explanation:
When Tom and Jerry, operating an ice cream business as equal partners, face a dispute over whether to reinvest profits or distribute them, they might choose to resolve their disagreement through arbitration. This alternative dispute resolution mechanism could help them avoid a court-mandated sale of their business, which might result in the destruction of its income potential. In arbitration, a neutral third party, the arbitrator, would make a binding decision after hearing both sides of the argument. In their case, an arbitrator would likely consider the principles highlighted by economist Ronald Coase regarding property rights and legal responsibilities.
Following Coase's theory, clearly defined property rights lead to parties seeking the least costly method of resolving issues. The arbitrator would likely analyze the partnership agreement and relevant business laws to determine each partner's rights. They may also consider efficient business operations and the long-term interests of the business, which could lead to a compromise, such as reinvesting a portion of the profits while distributing the remainder. This way, both Tom's and Jerry's interests could be addressed, preventing endless squabbling and aligning their actions with the goals of household decision making, where no redistribution of spending or investment would make them better off.