Each year, around Christmas, you decorate your home so elaborately that news crews come to film stories about your Christmas spirit. As a result, hundreds of people from all over the city drive by your house to see the "Christmas" home, creating noise and congestion that is a nuisance to your neighbors. As they have a right to not be bothered, you agree to pay your neighbors a modest sum to compensate them for the disturbance. This illustrates:

Question

Quizplus · Accepted Answer

The situation described matches the Coase theorem, which explains that when there are externalities (such as noise or congestion) affecting multiple parties, the parties can negotiate and come to an agreement that maximizes total benefits, regardless of who holds the property rights. In this case, the homeowner has the right to decorate their home as they please, but their neighbors have the right to not be disturbed. By negotiating and compensating their neighbors for the disturbance, the homeowner is able to continue decorating while minimizing the negative impact on their neighbors. Corrective taxes and subsidies are tools used by governments to incentivize or discourage certain behaviors, and the expendable argument theorem is not a recognized economic concept.

Each Year, Around Christmas, You Decorate Your Home So Elaborately