Roberto and Thomas live in a university hall of residence. Reberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true about an efficient solution to this externality problem if Roberto has the right to play loud music and if there are no transaction costs ?
Correct answer: C. Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music
- A. Thomas will pay Roberto between €100 and €150 and Roberto will continue to play loud music
- B. Roberto will pay Thomas €150 and Roberto will continue to play loud music
- C. Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music
- D. Roberto will pay Thomas €100 and Roberto will stop playing loud music
Explanation
Stopping the music is efficient because Thomas's €150 valuation of quiet exceeds Roberto's €100 benefit from loud music. With Roberto holding the right and no transaction costs, Thomas can pay any amount between €100 and €150 to induce him to stop.
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