Sandra and Mary live next to each other. Sandra has a dog that she walks every day. Sandra has to walk past Mary's front lawn and her dog always pees on Mary's flowers, which causes them to eventually die. Mary will move in a few months but, until then, she estimates she will spend $100 on flowers to replace the ones that die as a result of the daily visits from Sandra's dog. The only solution to this problem is a $50 fence that can be put around Mary's flowers that will protect them from Sandra's dog. a. What term do economists use for the consequences of Sandra's daily walks in this setting? b. Is it socially optimal to have the fence put around the flowers in this case? Why or why not? c. What does the Coase theorem say about how the social optimum could be achieved? Explain what an agreement between Sandra and Mary would look like if Mary has the right to not be bothered by her neighbour's dog.

Sandra and Mary live next to each other. Sandra has a dog that she walks every day. Sandra has to walk past Mary's front lawn and her dog always pees on Mary's flowers, which causes them to eventually die. Mary will move in a few months but, until then, she estimates she will spend $100 on flowers to replace the ones that die as a result of the daily visits from Sandra's dog. The only solution to this problem is a $50 fence that can be put around Mary's flowers that will protect them from Sandra's dog. a. What term do economists use for the consequences of Sandra's daily walks in this setting? b. Is it socially optimal to have the fence put around the flowers in this case? Why or why not? c. What does the Coase theorem say about how the social optimum could be achieved? Explain what an agreement between Sandra and Mary would look like if Mary has the right to not be bothered by her neighbour's dog.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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