Imagine that you live in a flat and some new people move in next door who like playing loud music late at night. Imagine that you don’t like loud music late at night.
1. In what way is this an externality?
2. Governments often put constraints around when loud music can be played. In this case we might call this a Pigouvian (after Arthur Pigou) approach to the problem. Why do you think this is called Pigouvian?
3. An alternative approach would be called Coasian (named after Ronald Coase). Briefly explain how a Coasian solution might work for you and your noisy neighbours
4. Now imagine that the noisy neighbours are in the flat first and you move in later. Can you still expect the neighbour to turn the music down even though you were a late-comer? If so, what does this tell you about property rights and timing?