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.
Last updated
About Microeconomics
Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
Practise Microeconomics
1,705 free Microeconomics MCQs from Economics, each with the correct answer and an explanation. Unlimited attempts, no account needed.
Exams that ask Economics questions like this
Economics is on 2 papers prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for every one of them.
Related questions
_____ 1954 study of U.S trade patterns showed that U.S exports were labor-intensive compared with U.S imports, even though the United States was widely regarded as a relatively capital-abundant nation ?
A attempts to limit outsourcing of jobs to foreigners by requiring that a minimum percentage of a product's value must be produced domestically if that good is to be sold in the domestic market ?
A binding price ceiling creates?
A borrower gives to creditor a security to grantee repayment of a loan. What is this security called ?
A buyer's willingness to pay is that buyer's ?