Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose Winston and Chloe decide to solve this problem using the Coase theorem. If they are successful, what is a possible result of the execution of this theorem?
A) The government taxes Winston for his loud music.
B) Chloe pays Winston weekly to refrain from playing music loudly.
C) Chloe and Winston solve their differences in a market for tradable allowances of loud music.
D) Winston pays Chloe once (as a fine) and refrains from playing music loudly.

Question

Quizplus · Accepted Answer

The Coase theorem suggests that if property rights are well-defined and transaction costs are low, parties can negotiate to solve externalities. Chloe paying Winston to reduce the noise is a possible negotiated solution.

Suppose Winston's Loud Music Externalizes a Cost onto His Neighbor