A meditation class meets on the second floor of a building.The first floor is a nightclub.The loud music from the club disturbs the classes.The club could be soundproofed for a cost of $5,000 or moved at a cost of $8,000.The classroom cannot be soundproofed enough to overcome the music,but the class can be moved at a cost of $4,000.According to the Coase theorem,_____
A)the club should be soundproofed so both businesses can stay open.
B)the club should be soundproofed because it is the one generating the externality.
C)the club should move rather than be soundproofed because eliminating an externality is better than compensating for it.
D)the class should move because it can eliminate the externality at a lower cost than can the nightclub.
E)whichever business has been there longer has a property right and the other should adjust.

Question

Quizplus · Accepted Answer

According to the Coase theorem, it doesn't matter who is generating the externality or who has the property right. The parties involved can negotiate a solution that is mutually beneficial. In this case, it is more cost-effective for the meditation class to move to a different location than for the nightclub to soundproof or move. Therefore, the class should move to eliminate the externality at a lower cost.

A Meditation Class Meets on the Second Floor of a Building.The