The Coase Theorem
Larue is learning to play the piano, but his roommate needs a quiet space to write his novel. Larue and his roommate are willing to split the difference between the willingness to pay for noise reduction and the willingness to accept it. The table shows the marginal benefit to Larue from playing for one to five hours, as well as the marginal external cost incurred by his roommate.
| Hour | Marginal Benefit | Marginal External Cost |
| 1 | 70 | 55 |
| 2 | 64 | 55 |
| 3 | 58 | 55 |
| 4 | 52 | 55 |
| 5 | 34 | 55 |
If Larue has the property rights to make as much noise as he likes, how many hours will he practice? Who gets how much money?
Suppose the roommate has the property rights to a quiet house. How many hours will Larue practice? Who gets how much money?
◦ 3 hours, Larue gets $110, 3 hours, Roommate gets $165
◦ 5 hours, Larue gets $0, 3 hours, Roommate gets $165
◦ 5 hours, Larue gets $0, 0 hours, Roommate gets $0
◦ 3 hours, Larue gets $110, 0 hours, Roommate gets $0
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