Question

Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose Winston and Chloe decide to solve this problem using the Coase theorem. If they are successful, what is a possible result of the execution of this theorem?a. The government taxes Winston for his loud music.

b. Chloe and Winston solve their differences in a market for tradable allowances of loud music.
c. Chloe pays Winston weekly to refrain from playing music loudly.
d. Winston pays Chloe once (as a fine) and refrains from playing music loudly.

Answer 1

d. Winston pays Chloe once (as a fine) and refrains from playing music loudly.

Step-by-step explanation:

Coase Theorem states that in case of externalities : two parties can bargain and arrive at an efficient outcome, if the transaction costs are low.

Winston's loud music is a negative externality for neighbour Chloe. So, the negative external cost can be compensated , by including it in monetary exchange mechanism .

For negative external effect upto now : Winston should pay chloe 'fine', as the former's act has had an extra extra social cost on the latter . Winston should also refrain from paying loud music thereafter.