Question

Jose owns a dog whose barking annoys jose's neighbor jane. Suppose that the benefit of owning the dog is worth $100 to jose and that jane bears a cost of $200 from the barking. Assuming jane has the legal right to prevent jose from having a dog, a possible private solution to this problem is

Answer 1

Jose has to pay $300 to Jane for her inconvenience.

According to Coase theorem, when two conflicting parties exist, one has to ‘buy the right’ from the other party.

In this case, Jane has the ‘right to prevent Jose from having a dog’.

Thus, Jose has to pay for compensation to Jane so that he can keep his dog and at the same time Jane is compensated for the inconvenience she faces.