Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,
A)Karen should pay Danny $400 so that she may keep her cat.
B)Karen should pay Danny $350 for tissues and allergy medication.
C)Danny should pay Karen $325 to give away her cat.
D)Danny should move.

Question

Quizplus · Accepted Answer

According to the Coase theorem, parties can negotiate to resolve externalities if transaction costs are low. Since Danny's cost ($350) is higher than Karen's benefit ($300), Danny should compensate Karen to remove the cat, ideally at a price between $300 and $350.

Karen's Cat Causes Danny to Sneeze