Assume that your housemate is very messy.Suppose he gets a $200 benefit from being messy but imposes a $300 cost on you.The Coase theorem would suggest that an efficient solution would be:

Question

Quizplus · Accepted Answer

The Coase theorem suggests that if transaction costs are low, parties can negotiate a mutually beneficial solution to externalities. In this case, paying the housemate between $200 and $300 to clean up would compensate him for his loss of benefit while costing you less than the $300 cost of his messiness.

Assume That Your Housemate Is Very Messy