Kylie loves to play loud dance music. Paul loves opera and hates dance music. Unfortunately, they are next-door neighbours in an apartment building with paper-thin walls.

a What is the externality here?

b What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome?

c Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, how might Kylie and Paul reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?