Help! I don\'t know how to deal with externalities with twobusinesses. This is t

Question

Help! I don't know how to deal with externalities with twobusinesses. This is the question I have to answer....

A confectioner has been making candy for years in his New York shopand has become quite famous for his unique candied creations. After thirty years, zoning law changed, and a new set of buildingare built next to the confectioner. A dentist opens up shopnext door, and after a while, becomes quite distressed. As itturns out, the confection machines are so loud that the dentist'spatients cancel their appointments and do not come back.

1. Suppose the dentist drags the confectioner to court, andthe judge sides with the dentist, ordering the confection machinesto be turned off. The dentists stands to gain $5,000 a monthin profit, while the confectioner lost $10,000 a month inprofit. Is this ruling socially efficient and why?

2. If the confectioner knew he would lose, could thesituation have been solved privately between the confectioner andthe dentist? If yes, how? If no, why? Assume thatthere can be no compromise in the way or time the dentist or theconfectioner ca run their business (only one business may beopen).

3. Now assume that the judge sided with the confectioner andtold the dentist that due to a grandfather clause, there wasnothing illegal in what the confectioner was doing. Is thisruling socially efficient and why?

4. If the dentist knew he would lose, could this newsituation have been solved privately between the confectioner andthe dentist? If yes, how? If no, why? Assume thatthere can be no compromise in the way or time the dentist orconfectioner can run their business (only one business may beopen).

Explanation / Answer

1. Suppose the dentist drags the confectioner tocourt, and the judge sides with the dentist, ordering theconfection machines to be turned off. The dentists stands togain $5,000 a month in profit, while the confectioner lost $10,000a month in profit. Is this ruling socially efficient andwhy? Yes, it is efficient. Now that a ruling has been made, thetwo can negotiate from here. Because the confectioner valuesrunning his equipment more than the dentist values their silence,the confectioner will pay the dentist somewhere between 5k and 10kto turn them back on. (See: The CoaseTheorem) 2. If the confectioner knew he would lose, could thesituation have been solved privately between the confectioner andthe dentist? If yes, how? If no, why? Assume thatthere can be no compromise in the way or time the dentist or theconfectioner ca run their business (only one business may beopen). Probably not because this is such a high transactions costsetting. 3. Now assume that the judge sided with theconfectioner and told the dentist that due to a grandfather clause,there was nothing illegal in what the confectioner was doing. Is this ruling socially efficient and why? Yes, because the confectioner values the machines being on morethan the dentist values them being off. Because the dentistis unwilling to pay the confectioner at least 10k, he's out ofluck. Just like the other scenario, the machines are workingin conjunction with their highest valued use. 4. If the dentist knew he would lose, could this newsituation have been solved privately between the confectioner andthe dentist? If yes, how? If no, why? Assume thatthere can be no compromise in the way or time the dentist orconfectioner can run their business (only one business may beopen). Same problem - high transactions costs screw itup. ---Those are just the basics of the situation, I'm not sure howelaborate you wanted it, but hopefully this will get the ballrolling. Also, just out of my own curiosity - can you send me a privatemessage with the name of the text book? I think I know whereits coming from and it would be cool if I was right. Thanks,

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