Coase theorem Regardless of the specific initial assignment of property rights, the final outcome will be efficient provided that the property rights are well-defined and that the parties can reach and enforce an agreement at zero cost Problems 1. Elsie and Sarah live in different floors in an apartment complex. Elsie's apartment is directly above Sarah's apartment. Elsie is a concert pianist and Sarah is a poet. Whenever Elsie rehearses her concert pieces in her apartment, Sarah's productivity in poetry will go down because of the noise. The following table shows the monthly payoffs to Elsie and Sarah when Elsie's apartment is and is not soundproofed. Soundproofed Not soundproofed S500S900 $800 Gains to Elsie Gains to Saral $300 Assume that negotiations are costless. (a) In terms of social efficiency, should Elsie's apartment be soundproofed? Why? (b) If Elsie has the legal right to make any amount of noise she wants, will she Il and maintain soundproofing? Is Elsie's choice socially efficient? Explain (c) If Sarah has the legal right to peace and quiet, will Elsie install and maintain soundproofing? Is Sarah's choice socially efficient? Explain. (d) Using your answers to (a) - (c), discuss whether the following statement is true, false, or uncertain: "According to the Coase theorem, the allocation of resources as well as the distribution of gains does not depend on who has the property right." Coase theorem Regardless of the specific initial assignment of property rights, the final outcome will be efficient provided that the property rights are well-defined and that the parties can reach and enforce an agreement at zero cost Problems 1. Elsie and Sarah live in different floors in an apartment complex. Elsie's apartment is directly above Sarah's apartment. Elsie is a concert pianist and Sarah is a poet. Whenever Elsie rehearses her concert pieces in her apartment, Sarah's productivity in poetry will go down because of the noise. The following table shows the monthly payoffs to Elsie and Sarah when Elsie's apartment is and is not soundproofed. Soundproofed Not soundproofed S500S900 $800 Gains to Elsie Gains to Saral $300 Assume that negotiations are costless. (a) In terms of social efficiency, should Elsie's apartment be soundproofed? Why? (b) If Elsie has the legal right to make any amount of noise she wants, will she Il and maintain soundproofing? Is Elsie's choice socially efficient? Explain (c) If Sarah has the legal right to peace and quiet, will Elsie install and maintain soundproofing? Is Sarah's choice socially efficient? Explain. (d) Using your answers to (a) - (c), discuss whether the following statement is true, false, or uncertain: "According to the Coase theorem, the allocation of resources as well as the distribution of gains does not depend on who has the property right
