A metal-stamping factory moves next to a day care center.Noise from the factory makes it impossible for the kids to nap.It would cost the factory $5 million to move; it would cost $1 million for the day care center to move.Sound insulation for the factory costs $1 million; insulation for the day care center costs $200, 000.The court initially determines that the day care center has the property right and orders the factory to purchase insulation for the day care.But on appeal the factory is awarded the property right.How would the optimal solution to this problem change after the appeals court decision?
A)The insulation would still be bought, but it would be bought by the day care center, a result consistent with the Coase theorem.
B)Insulation for the factory would be bought instead of insulation for the day care center, a result consistent with the Coase theorem.
C)Insulation for the day care center would still be bought, but it would be bought by the factory, a result consistent with the Coase theorem.
D)Insulation for the factory would be bought instead of insulation for the day care center, a result inconsistent with the Coase theorem.
E)The day care center would move instead of buying insulation, a result consistent with the Coase theorem.

Question

Quizplus · Accepted Answer

The Coase theorem suggests that parties will negotiate to reach an efficient outcome regardless of the initial allocation of property rights, as long as transaction costs are low. With the factory having the property right, the day care center would choose the least costly option, which is to buy insulation for itself.

A Metal-Stamping Factory Moves Next to a Day Care Center