Question

Assume that your roommate is very messy. according to campus policy, you have a right to live in an uncluttered apartment. suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. the coase theorem would suggest that an efficient solution would be for your roommate to
a. demand payment of at least $60 but no more than $80 to clean up after herself.
b. continue to be messy and force you to move out.
c. stop her messy habits or else move out.
d. pay you at least $60 but less than $80 to live with the clutter.

Answer 1

Hey there! The answer is D.

The most efficient solution would - according to Coase theorem - be to pay you at least $60 but less than $80 to live with the clutter.

The Coase theorem states that two different parties can come to a Pareto-efficient solution in case of an economic conflict. A Pareto-efficient solution means that the allocation of means cannot be improved for one, without making another worse off.

In this particular situation the mess of your roommate imposes a $60 cost on you. Because your roommate has a $80 benefit from living messy, she has to compensate you the money that her mess costs you. When she'd do this, both of you will live in optimal wealth, and the allocation of means is efficient.

Hence, the answer is D.