A meditation class meets on the second floor of a building; the first floor is a nightclub. The loud music from the club disturbs the classes. The club could be soundproofed for a cost of $5,000 or move at a cost of $8,000. The class cannot be soundproofed enough to overcome the music, but could be moved for $4,000. According to the Coase theorem, _____.
A)the club should be soundproofed so both businesses can stay open
B)the club should be soundproofed because it is the one generating the externality
C)the club should move rather than be soundproofed because eliminating an externality is better than compensating for it
D)the class should move because it can eliminate the externality at a lower cost than can the nightclub
E)whichever business has been there longer has a property right and the other should adjust

Question

A meditation class meets on the second floor of a building; the first floor is a nightclub. The loud music from the club disturbs the classes. The club could be soundproofed for a cost of $5,000 or move at a cost of $8,000. The class cannot be soundproofed enough to overcome the music, but could be moved for $4,000. According to the Coase theorem, _____.​
A)the club should be soundproofed so both businesses can stay open
B)the club should be soundproofed because it is the one generating the externality​
C)the club should move rather than be soundproofed because eliminating an externality is better than compensating for it​
D)the class should move because it can eliminate the externality at a lower cost than can the nightclub​
E)whichever business has been there longer has a property right and the other should adjust​

Quizplus · Accepted Answer

According to the Coase theorem, the outcome will be efficient regardless of who bears the cost or property rights, as long as transaction costs are low. In this case, the most efficient outcome would be for the class to move since it can eliminate the externality at a lower cost than the nightclub can. Therefore, the class should bear the cost of moving, and the nightclub should not have to bear the cost of soundproofing or moving.

A Meditation Class Meets on the Second Floor of a Building;