Question

Jay mentioned that there is a bar near his apartment that often plays loud music at night. While this doesn’t impact him much, but as he mentioned that he can imagine that the apartments above the bar are very much impacted.

A. Does the example meet the conditions for a well- defined externality? Why or why not? Go over the conditions and explain.
B.If the answer to A is yes, is the externality pecuniary (does a price change) or real (there is no market for it)? explain. If the externality is real, suggest ways to correct it that is not the one suggested by the author of the thread. Be explicitly about how your suggestion will correct the problem

Answer 1

Yes, the example meets the conditions for a well-defined externality. The externality in this case is real, and suggestions to correct it include implementing soundproofing measures, enforcing noise regulations, and considering relocation of the bar.

Step-by-step explanation:

A. Yes, the example meets the conditions for a well-defined externality. The conditions for a well-defined externality include:

1. There must be an economic transaction involving two or more parties.
2. There must be a third party who is not involved in the transaction but is affected by it.
3. The impact on the third party must be external to the transaction.

In the given example, the economic transaction involves the bar playing loud music and the apartment residents. The third party, the residents of the apartments above the bar, are not involved in the transaction but are affected by the loud music, which is external to the transaction. Therefore, it meets the conditions for a well-defined externality.

B. The externality in this case is real, as there is no market for it. The impact of loud music on the apartment residents cannot be resolved through a price change or market transaction. To correct this externality, suggestions include:

• Implementing soundproofing measures in the apartments.
• Enforcing noise regulations for the bar, such as sound limits and restricted playing hours.
• Relocating the bar to a more suitable location away from residential areas.

These suggestions would help to minimize the negative impact of the loud music on the apartment residents without relying on market mechanisms.