Your neighbor in an apartment complex plays his music very loudly late at night, which makes it difficult for you to get to sleep. You offer the neighbor $50, the monetary value you put on your sleep, to never play his music between midnight and 7 AM. By doing so

Question

Quizplus · Accepted Answer

By offering the neighbor $50, the monetary value put on the sleep, you have indicated the cost of the externality, which internalizes the externality. This is because the neighbor now has an incentive to not play the music during the specified time frame, as it is more expensive for them to do so than the benefit they would receive from playing the music. This way, the external cost (disturbance of sleep) is internalized by the neighbor and becomes a part of their decision-making process. This is considered an efficient solution as it addresses the issue at hand without involving the police or the legal system.

Your Neighbor in an Apartment Complex Plays His Music Very