Paul owns a home on the top of a hill and enjoys an unobstructed view of a large wooded area.The view was a large factor in his decision to buy the house and Paul values his view at $5000 per month.Sid purchases the undeveloped wooded area with plans to build a retail shopping centre.Sid expects to earn $10,000 a month from the shopping centre,which is $3000 more than his next best alternative.
-Refer to the information above.The reciprocal nature of externalities expressed by Coase is illustrated by noting that
A) Paul is the only one harmed.
B) Sid is the only one who benefits.
C) Sid does not have to build the shopping centre.
D) if Paul is successful in legally stopping construction of the shopping centre,Sid will be harmed.
E) Paul could move elsewhere.

Question

Quizplus · Accepted Answer

This is because Paul's enjoyment of his view is being harmed by the construction of the shopping centre, while Sid's potential profits are being benefited. This creates a conflict between the two parties, which Coase suggests can be resolved through negotiation and bargaining. If Paul is successful in legally stopping construction, this would harm Sid's potential profits and create a loss for him, illustrating the reciprocal nature of externalities.

Paul Owns a Home on the Top of a Hill