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Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct? aIf Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog. bIf Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial. cDick will pay to keep his dog if his benefit exceeds Jane's cost. dIf Dick's benefit exceeds Jane's cost, government intervention is necessary.

Question

Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct? aIf Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog. bIf Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial. cDick will pay to keep his dog if his benefit exceeds Jane's cost. dIf Dick's benefit exceeds Jane's cost, government intervention is necessary.

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Solution

The correct statement is c. Dick will pay to keep his dog if his benefit exceeds Jane's cost. This is based on the Coase theorem, which states that if transaction costs are zero, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, if Dick values the dog's presence more than Jane values her peace and quiet, he will compensate her for the inconvenience, thus making both parties better off.

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