Roberto and Thomas share a university dorm room. Roberto enjoys playing loud music, valuing it at €100, while Thomas prefers silence, valuing peace at €150. Assuming Roberto has the legal right to play loud music and there are no costs involved in negotiation, which of the following best describes an efficient outcome to this externality issue?

Show Answers

Thomas compensates Roberto with an amount between €100 and €150, and Roberto keeps playing loud music.Roberto pays Thomas €150 and continues to play loud music.Thomas offers Roberto a payment ranging from €100 to €150, leading Roberto to stop playing loud music.Roberto pays Thomas €100 and ceases playing loud music.None of the above accurately describes the efficient resolution.

Explanation

Since Roberto has the right to play loud music, Thomas can negotiate by paying Roberto an amount between €100 (Roberto's valuation) and €150 (Thomas's valuation) to persuade him to stop playing music. This payment makes Roberto better off by compensating for his loss, and Thomas gains by enjoying quiet, resulting in an efficient solution where Roberto ceases playing loud music.