A Meditation Class Meets on the Second Floor of a Building;

question 114

Multiple Choice

A meditation class meets on the second floor of a building; the first floor is a nightclub. The loud music from the club disturbs the classes. The club could be soundproofed for a cost of $5,000 or move at a cost of $8,000. The class cannot be soundproofed enough to overcome the music, but could be moved for $4,000. According to the Coase theorem, _____.​

• A)the club should be soundproofed so both businesses can stay open
• B)the club should be soundproofed because it is the one generating the externality​
• C)the club should move rather than be soundproofed because eliminating an externality is better than compensating for it​
• D)the class should move because it can eliminate the externality at a lower cost than can the nightclub​
• E)whichever business has been there longer has a property right and the other should adjust​

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Definitions:

Framing

Aspects of the presentation of information about a problem that are assumed by decision makers.

Confirmation Bias

The tendency to seek out information that conforms to one’s own definition of or solution to a problem.

Economic Person

A concept in economics and sociology that describes an individual who acts in a rational manner, making decisions based on maximizing personal financial gain.

Rational Decisions

Choices made based on logical reasoning, where alternatives are objectively evaluated based on facts and a clear understanding of goals.