Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $300 per week. If you have a right to live in peace and quiet, how can you achieve the efficient outcome?

Question

Quizplus · Accepted Answer

The efficient outcome would be for the neighbor to pay an amount that compensates for the negative externalities caused by the noise and mess ($300 per week) and still allows him to earn a profit ($400 per week). Therefore, the neighbor should pay you some value between $300 and $400 to achieve the efficient outcome. Option A is incorrect because if he cannot afford to pay you enough money, he cannot operate his business, which is not efficient. Option B is also incorrect because it only compensates you partially for the negative externalities, and it may not be enough for him to make a profit. Option D is not necessary, as he only needs to compensate for the negative externalities caused by his business.

Suppose Your Neighbor Likes to Repair Motorcycles in His Front