Final answer:
The efficient solution with no transaction costs is for David to pay Wong to stop playing loud music, since David values quiet more than Wong values loud music. In the trumpet firm case, the negative externality is noise pollution, adjusting the supply curve and market equilibrium. Clarified property rights can provide efficient solutions to externalities, as illustrated by the example of a railroad and a farmer. A. Wong should play loud music to maximize his value.
Step-by-step explanation:
The question posed relates to the concept of externalities and efficient market solutions when faced with such externalities. In the dorm scenario with Wong and David, if Wong has the right to play loud music and there are no transaction costs involved, the efficient solution is for David to offer compensation to Wong for not playing the music. Since David values peace and quiet at $100 and Wong values playing loud music at $50, Wong would be willing to accept some amount over $50 for not playing the music. Hence, efficient market theory suggests that as long as the compensation is between $50 and $100, both parties can potentially be better off.
Turning to the trumpet firm example, the negative externality here is the noise pollution created by playing trumpets on the street. The equilibrium price and quantity are determined by where the supply and demand curves intersect. When accounting only for private costs, this equilibrium does not consider the noise pollution impacting bystanders. However, once social costs, like noise pollution, are considered, the supply curve shifts, reflecting the increased costs to society, and a new equilibrium is reached. This typically results in a lower quantity and higher price for the good or service.
The concept of better-defined property rights as illustrated by Ronald Coase suggests a way to address externalities. In the example of the railroad and the farmer, it is up for determination who should bear the cost of mitigating the negative effects of the sparks, with the implication that clear property rights can lead to an efficient solution without the need for government intervention.