Question

My daughter shares an apartment with five other women. Three share her appreciation for the music of Ella Marija Lani Yelich-O’Connor, a.k.a. Lorde. My daughter and the other Lorde fans would happily pay $7 each to listen to her music on returning home from work. The other two women are completely tired of the melodrama and would pay $12 each to not have to hear her.

1. What is the efficient outcome? Would you expect this to happen?
2. Does it matter that my daughter owns the stereo? Would it change the efficient outcome if one of the women who doesn’t like Lorde owned the stereo?
3. What happens to the efficient outcome if a Lorde fan moves out?
4. Would you expect the fans to get their way? What problem might stand in their way?

Answer 1

1. The efficient outcome would be that the other two women who are tired of melodrama would pay the othree three women to not play Lorde music. Since they are willing to pay $12, it would be efficient to pay the other three women any amount between $7 to $12 so that the utility of both the parties can be maximum. Yes, this arrangment can be negotiated between them so that Lorde music plays for some time.

2. The initial allocation of property rights decides who has the right to the asset. So if the daughter owned the stereo, then she would have complete rights to play the music of her taste, which means that the other two women will have to pay her to not play the music. On the other hand, if one of the other two women owned the stereo, then the daughter will have to pay them in order to listen to the music of her choice.

3. If a Lorde fan moves out of the flat, then the bargaining power of the other two women might be enhanced. Because the other two women who were not Lorde fans were willing to pay more, they can now pay lesser and still ensure that melodrama is not played at home.

4. The fans might ger their way as they would negotiate among themselves to play Lorde music for some time only so that the other two women also ger their way and are not made worse off.