Paolo loves opera and hates rock 'n' roll. Kenji loves playing rock 'n' roll music at high volume. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.

In this case, imposes a externality on his neighbor in the form of noise pollution.

Why might a command-and-control policy that forbids music to be played above a certain decibel level lead to an inefficient outcome?

An efficient outcome can be achieved only if everyone can do what they love.

Kenji playing his music loudly does not do any harm if Paolo is not home.

It is unfair because such policy would restrict Kenji's activity but not Paolo's.

Suppose the landlord lets the tenants do whatever they want.

True or False: According to the Coase theorem, Kenji and Paolo can never reach an agreement without a third party assisting in the negotiations.

True

False