Sam and Mary are neighbors. Sam likes listening to rock music at high volume but

Question

Sam and Mary are neighbors. Sam likes listening to rock music at high volume but hates jazz music. Mary likes listening to jezz at high volume but hates rock.

a: Both Sam and Mary complain about their neighbor to the landlord. What kind of regulation can the landlord implement to solve the problem? Is this direct regulation efficient? Explain your answer.

b: According to the Coase theorem, how might Sam and Mary reach an efficient outcome on their own?

c: Why might the Coase theorem not work in reality?

Explanation / Answer

Answer :

a). Both Sam and Mary complain about their neighbor to the landlord. The landlord can implement the direct regulation to solve the problem. Yes, this is direct regulation efficient as the direct regulation efficient generally works on the principle of command and control. The landlord can command Sam and Mary not to indulge themselves into conflict and control the matter by directing them the way out to sort their problem. Also, Direct regulation efficiency includes within itself to tell the pros and cons of the matter which states what is legal and what is illegal. The landlord can explain the same thought of legality and ilegality to Sam and Mary and ask them to sort out the matter. Thus, this includes direct regulation efficient.

b). Theoritically, The Coase theorem states that where there is a conflict of property rights, the involved parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights. The theorem also asserts that in order for this to occur, bargaining must be costless; if there are costs associated with bargaining (such as meetings or enforcement), it will affect the outcome. The Coase theorem shows that where property rights are concerned, involved parties do not necessarily consider how the property rights are granted if they can trade to produce a mutually advantageous outcome.

Thus, According to the coase theorem, Sam and Mary may reach an efficient outcome on their own by bargaining or negotiating on the terms that are beneficial to both of them. The theorem also asserts that in order for this to occur, bargaining must be costless; if there are costs associated with bargaining it will affect the outcome.

c). In reality, the coase theorem might not work because the coase theorem involves within itself the property rights or other complete competitive markets with no transaction costs to stand good. Also, an efficient set of inputs and outputs along with production schedules prove good for the applicability of the coase theorem. Coase theorem asserts that when property rights are involved, parties naturally gravitate toward the most efficient and mutually beneficial outcome.
Since, in the given condition, Sam and Mary does not hold a problem relating to industry which might involve property rights or other such issues, thus, coase theorem does not workin reality.

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