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The Coase Theorem is often applied in court cases where the parties seek to clarify who has the right to do what in the presence of externalities. Consider the case of the addition to my house that will then cast a shadow on your swimming pool. Suppose that my benet from the addition is b, and the cost you incur from my shadow is c. Suppose throughout this exercise that transaction costs are zero. Assume that you and I both know what b and c are.1. If we both know b and c, why dont we just get together and try to settle the matter over co¤ee rather than ending up in court? (3 Points)2. If the judge (who has to decide whether I have a right to build my addition) also knows b and c, propose a sensible and e¢ cient rule for him to use to adjudicate the case. (3 Points)3. Judges rarely have as much information as plaintiffs and defendants. It is therefore reasonable for the judge to assume that he cannot easily ascertain b and c. Suppose he rules in my favor. What does Coase predict will happen? (4 Points)

The Coase Theorem is often applied in court cases where the parties seek to clarify who hasthe right to do what in the presence of externalities. Consider the case of the addition to myhouse that…

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