Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $500 per week. If your neighbor has a right to operate this business, how can you achieve the efficient outcome?

A) You cannot afford to pay him enough money to stop working on motorcycles, and he continues to operate the business.
B) You pay him some value between $0 and $100 to close his home business.
C) You pay him some value between $400 and $500 to close his home business.
D) You pay him at least $500 to close his home business.

Question

Boramey Phorn · Accepted Answer

Final Answer : C, Explanation :  Paying the neighbor some value between $400 and $500 to close his home business achieves the efficient outcome because it compensates him for the income he would lose by closing the business while also fully accounting for the negative externality imposed on you. By paying him at least $400, he is no worse off financially than he would be if he continued operating the business. By paying him up to $500, you fully compensate for the negative externality imposed on you and achieve the efficient outcome.

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