George and Jane are next-door neighbours. George likes listening to pop music at high volume but hates opera. Jane likes listening to opera at high volume but hates pop music.
a) What is the externality in the above case?
b) Both George and Jane complain about their neighbour to the landlord. What kind of ‘regulation’ can the landlord implement to solve the problem? Is this direct regulation efficient? Explain your answer.
c) According to the Coase theorem, how might George and Jane reach an efficient outcome on their own?
d) Why might the Coase theorem not work in reality?