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July 23, 2014

Homework Help: Econ MC

Posted by Econ on Tuesday, April 17, 2007 at 10:41pm.

Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Dick has the legal right to keep the dog, which of the following choices are true?
a. A private solution can always be arranged.
b. A private solution can be arranged only if the cost Jane bears exceeds the benefit Dick gets from his dog.
c. A private solution can be arranged
only if Jane's cost equals Dick's benefit from the dog.
d. A private solution can be arranged only if Dick's benefit from his dog exceeds Jane's cost.

According to Coase theorem, an
economy can always reach an efficient
solution as long as transaction costs are low. So is the answer a)?

You have stated why the answer may not be a. Is a) true if transactions costs are high? (Unless you think that no change because transaction costs are high is, in it self, a private solution).

Unlike many other economics problems with a continuum of possible solutions. Here, either Dick keeps the dog or he doesnt. (He cannot keep 1/2 a dog)

So, look again. What must be true for a transaction to occur where both parties are better off.

I believe is d?

No.

Ask these questions: How much does Dick need to give up his dog? How much is Jane willing to pay to get rid of Dick's dog.

(Note that one could argue that, under d, an optimal private solution already exists; the value of the dog exceeds the costs from the dog. But, I dont think thats what the question is asking.)

ok, so for d) it means that if Dick has the rights, and its benefit exceeds Jane's cost, Dick wouldn't have to pay Jane anything at all.



Since Dick as the rights, by your initial assumption, then Jane has to pay Dick to get rid of the dog. Think opportunity cost here: Let X be the "cost" to Jane from the barking dog. That is, she would pay Dick up to X to get rid of the dog. Let Y be the "benefit" from the dog to Dick. He would need to be paid an amount of Y or more to get rid of the dog. So, a transaction will only take place if X>Y. Go with b)

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