Hamid and Lee are neighbors. Hamid has a barking dog that he keeps in his backyard for property protection; he values the dog at $600. Lee despises the constant barking, because it costs him $800 in lost sleep. Assume Hamid has a legal right to own a barking dog. Because Hamid speaks Farsi and Lee speaks Korean, they need an interpreter to handle negotiations regarding the dog. There ____ a Coase solution to this problem if the interpreter costs $70 and ____.
A) is; Hamid pays Lee
B) is; Lee pays Hamid
C) is not; neither person pays the other
D) is; neither person pays the other

Question

Quizplus · Accepted Answer

The Coase theorem suggests that if transaction costs are low, parties can negotiate to reach an efficient outcome. Here, Lee values the absence of barking more than Hamid values the dog, so Lee can pay Hamid to remove the dog. The cost of the interpreter ($70) is less than the difference in their valuations ($800 - $600 = $200), allowing for a mutually beneficial agreement.

Hamid and Lee Are Neighbors