. Jones owns a restaurant whose patrons value quiet. Everythingwas fine so long as Chez Jones was...
Question:
. Jones owns a restaurant whose patrons value quiet. Everythingwas fine so long as Chez Jones was located next to a florist, butthe florist shop is replaced by a dance studio , owned by Smith,which generates a high level of noise. Assume that without anysoundproofing, Jones loses $200 in profits in lost sales fromcustomers who don’t eat at her restaurant because of the noise fromthe dance studio. Suppose further that Smith could installsoundproofing that would completely reduce the noise at a cost of$150. Assume further that property rights are such that Smith isunder no legal obligation to abate noise resulting from hisoperation Without Soundproofing With Soundproofing (Change in)Smith’s Profit +$150 0 (Change in) Jones Profit -$200 0
a. Would itbe economically efficient in this example for someone to spend $150to abate the noise caused by the dance studio? (Briefly explainyour answer). (5 points).
b. Assume that there are no transactionscosts to bargaining between Smith and Jones. What does Ronald Coasepredict would happen in this case? (10 points).
c. Suppose insteadthat the total costs of bargaining between Smith and Jones equaled$75. Would your answer to b change in that case, and if so how? (8points).
d. In the case of c can you recommend an economicallyefficient policy? (7 points). Note no graphs are needed to answerthis question. Work with the data in the problem to reason to theanswers.
South-Western Federal Taxation 2020 Comprehensive
ISBN: 9780357109144
43rd Edition
Authors: David M. Maloney, William A. Raabe, James C. Young, Annette Nellen, William H. Hoffman