Question

C3 [9 marks] Morrissey can play music with or without soundproofing. Music without soundproofing results in noise damage to his neighbour Johnny. The relevant gains and losses for Morrissey and Johnny are listed in the table:

without soundproofing with soundproofing

Gains to Morrissey 185 pw   69 pw

Damages to Johnny   160 pw 41 pw

a) If Morrissey is not liable for noise damage and there are no negotiation costs, will he install soundproofing? Explain.

b) How, if all, would your answer differ if the negotiation costs of maintaining an agreement were $4 per week? Explain.

c) Now suppose Johnny can escape the noise damage by moving to a new location, which will cost him $155 per week. With negotiation costs again assumed to be zero, how, if at all, will your answer to part (a) differ? Explain.

Answer 1

With soundproofing: Gains to M is 69 per week and loss to J is 41 per week

Without soundproofing: Gains to M is 185 per week and loss to J is 160 pr week

(a) If M is not liable for noise damage and there are no negotiation costs, so M does not lose anything while playing music, and get all the gains. He is not compensating for any damage that J might occur. Then, he will not install soundproofing because clearly his gains from not installing soundproofing is more than that from installing (185>69),

(b)Now negotiation cost of maintaining an agreement is $4. Net gains to M falls to 181 per week. But it is still profitable when compared to not install soundproofing. He is still not paying any compensation to J. So the answer to (a) does not change.

(c) Now, J can move to a new location at $155. Let's assume that this is the compensation that M pays J in return to play loud music. Negotiation costs are 0. So, without soundproofing, net gains to M falls to 30 pw. These are low when compared to gains from installing soundproofing. so, in this case, M finds it profitable to install soundproofing and answer to (a) changes.