Suppose that a mechanic owns a building and is renting part of the building's space to a doctor. Further suppose that because the mechanic is the owner, he has the right to make noise during the day while he fixes cars. While the doctor cannot insist on a quiet environment, the doctor could move to a quieter building. However, rent in the next best building is $400/month more than rent in the noisy building. The mechanic can adopt a new technology that eliminates the noise for $325/month. Given this situation, can the doctor find a private solution with the mechanic that will make both better off

Question

Yasmine Estes

Business

4 October, 00:52

Suppose that a mechanic owns a building and is renting part of the building's space to a doctor. Further suppose that because the mechanic is the owner, he has the right to make noise during the day while he fixes cars. While the doctor cannot insist on a quiet environment, the doctor could move to a quieter building. However, rent in the next best building is $400/month more than rent in the noisy building. The mechanic can adopt a new technology that eliminates the noise for $325/month. Given this situation, can the doctor find a private solution with the mechanic that will make both better off

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Answers (1)

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Nikolai Branch · Answer 1

The doctor can pay for the technology that eliminates noise.

Explanation:

In a Coase equilibrium, both parties will seek a solution that is economically profitable for both of them regardless of the initial position each party held.

In this case, the doctor is trying to save as much as he can and avoid paying $400 extra per month, while the mechanic's only incentive to reduce noise is to retain the tenant (doctor).

If the doctor is willing to pay for the new technology that eliminates noise on the surrounding offices, then both will win:

the doctor will win = $400 - $325 = $75 per month the mechanic's situation is not affected, but the tenant will remain