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 move at a cost of $8, 000.The class can't soundproof enough to overcome the music, but could be moved for $4, 000.According to Coase, a socially optimal solution can be achieved if
A)the local government purchases the building
B)the building is torn down
C)property rights to be noisy are granted to the nightclub
D)property rights to a quiet environment are granted to the meditation class
E)both the nightclub and the meditation class relocate

Question

Quizplus · Accepted Answer

Coase's theorem suggests that if property rights are clearly defined and transaction costs are low, then the parties involved can negotiate to reach an efficient outcome on their own. In this case, the best option would be to grant property rights to a quiet environment to the meditation class. This would give the nightclub an incentive to either soundproof their establishment or move to a different location, as they would be responsible for the cost of their noise pollution. The cost of moving the meditation class is lower than the cost of either soundproofing the nightclub or moving it altogether, so granting property rights to the quiet environment would be the socially optimal solution.

A Meditation Class Meets on the Second Floor of a Building;