Question

The students living in "The Party House" are prone to host loud parties on Saturday night. They value these celebrations at 100. Their studious neighbors value peace and quiet at 90. The noise ordinance in this college town requires the police to stop loud parties if the neighbors complain. Assume zero transaction costs. An efficient solution for this problem would be for

Answer 1

An efficient solution for the conflict between the party house and the neighbors would involve negotiation to reach a compensation agreement, following the principles of the Coase Theorem, where the party with fewer rights compensates the other to reach a mutually beneficial outcome.

Step-by-step explanation:

The student's question is related to an efficient solution for resolving a conflict between neighbors in the context of externalities and public policies, such as noise ordinances. The heart of the question involves the concept of Coase Theorem, suggesting that if transaction costs are zero, parties can negotiate an agreement that will lead to the efficient outcome without the need for government intervention. In this case, an efficient solution may involve the party house's residents compensating their neighbors to allow the parties to continue or the neighbors paying the party house's residents to be quieter. If the neighbors' willingness to accept compensation is lower than the value the party house places on the party (90 versus 100), the parties can agree on a compensation between those values and both be better off. However, the solution will depend on the initial distribution of property rights, for example, whether the right to hold loud parties or the right to peace and quiet is protected by law.