Question

2. Joan loves dogs and decides that she is going to buy one. She analyzes the benefit she will get from owning a dog and values the benefit of owning a dog at $500. Joan's next-door neighbor loathes dogs and is vehemently opposed to dogs being in the neighborhood. This neighbor, Mike, views the cost of an additional dog in the neighborhood as being $800. Ac- cording to the Coase theorem, is it possible for Joan and Mike to amicably resolve this dilemma about the dog ownership? In your answer, identify how this conflict can be re- solved, provided that the rights to dog ownership are well defined. Also, in your answer, ex- plain why it does not matter who owns the rights to dog ownership, provided that these rights are well defined.

Answer 1

As per Coase's Theorem, if there is low transaction cost, bargaining will lead to an efficient outcome.

In this case, As Mike views the cost of an additional dog in the neighbourhood as being $800, and Joan values the benefit of owning a dog at $500. So in order to amicably resolve this dilemma about the dog ownership, Mike should pay $600 to Joan and convince him not to own the dog. In this way , there would be a win-win situation for both Mike and Joan. Mike would pay $600 which is less than $800 if Joan buys the dog. Joan would get $600 which is more than the benefit of owning a dog ($500). Thus both would be benefitted.

It does not matter who owns the rights to dog ownership as the result would remain the same irrespective of the ownership of the dogs. In this case, the ownership would not affect the result of bargaining and thus it does not matter who owns the rights to dog ownership.