Chapter 10 Question 8 Ringo loves playing rock 'n' roll music at high volume. Luciano loves opera and hates rock 'n' roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls. A) What is the externality here? The externalities are the music and the noise. B) What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome? The landlord could impose a policy that would limit the amount of music or a time limit that music can be played. This could lead to an ineffecient outcome because neither tenant is really getting an outcome they are happy with. C) Suppose the landlord lest the tenants do whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficinet outcome on their own? What might prevent them from reaching an efficient outcome? If the landlord let them do whatever they wanted and the Coase theorem was in play, the tenants could find an equal amount of time that they could play their own music and take turns playing it. Regulations by the landlord could prevent them from working together to find an efficient outcome.
Chapter 10 Question 9 Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits.