Maria lives next door to Alice. Alice regularly plays loud music, which often disturbs Maria. Maria went over to Alice's house yesterday and asked her to turn down her music because loud music adversely affects her. Alice has complied. Which of the following best describes the economists' view of what has happened?

Question

Quizplus · Accepted Answer

The question describes a classic case of a negative externality, where the loud music played by Alice is affecting Maria. The cost to Maria (the external cost) is not reflected in the price that Alice pays for playing her music. The economists' view is that this problem arises because the marginal social costs of loud music (including the external cost to Maria) are greater than the marginal private costs of loud music (only the direct cost to Alice). In this case, Maria persuading Alice to turn down the music is an example of internalizing the externality, where Alice is now taking into account the effect her actions have on Maria. Therefore, option B is the correct answer.

Maria Lives Next Door to Alice