Your upstairs neighbor has the right to practice his clog dancing at night. But you find the best time to study is at night, and the noise from the clog dancing makes it hard for you to concentrate. You tell your neighbor that you will wash his car every week if he does not practice his clog dancing at night and he agrees to this. This is an example of the

A) free-rider problem.
B) drop-in-the-bucket problem.
C) Coase theorem.
D) fallacy of composition.

Question

Raj Roland Pandey · Accepted Answer

Final Answer : C, Explanation :  This scenario exemplifies the Coase theorem, which suggests that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, you and your neighbor negotiated a solution to the noise problem (the externality) that works for both of you, demonstrating the theorem in action.

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