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1.
Imagine you own an apartment in Gaza next to another apartment owner
with a baby who cries every two hours at night. The value you place on good
night’s sleep is $200. The cost of installing a sound-proof wall is $1500. The
cost of good earplugs is $50. The value your neighbor places on letting the
baby cry to get the baby used to falling asleep by himself is $500. (6)
a.
If your neighbor has the right to make noise, explain the range of possible
amounts of money that would be exchanged between the two parties or costs
incurred AND the socially efficient outcome.
Option 1: Put up with the noise: Cost = $200
Option 2: Install wall: Cost = $1500
Option 3: Pay neighbor to console baby when he cries: Cost = >$500
Option 4: Buy earplugs: Cost = $50
The socially optimal solution in the absence of government intervention such
as noise regulations (which is unnecessary in this situation given the small
number of parties involved and low cost of bargaining) is to buy the earplugs.
b.
Does the fact that your neighbor has the property right effect what the
socially efficient outcome is? PROVE YOUR ANSWER.
If I owned the right to peace and quiet, buying earplugs is still the efficient
option:
Option 1: Neighbor pays me to put up with noise: Cost = >$200
Option 2: Neighbor installs wall: Cost = $1500
Option 3: Neighbor gets up at night to console baby: Cost = $500
Option 4: Neighbor buys you earplugs: Cost = $50