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Hi, everyone.
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Today we will be solving problem six from chapter 10, which discusses the coast theorem and when it applies.
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So before we answer this question, just as a bit of a definition, the coast theorem basically says that if private parties in an economy can bargain over the allocation of resources, then they can solve the problem of externalities on their own.
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And as an example, the book discusses this example with two neighbors.
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And a dog.
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So neighbor a has a dog and this dog is very loud and ends up disturbing neighbor b.
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So the problem that needs to be bargained over is the fact that the dog is disturbing neighbor b.
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Neighbor b would rather that the dog goes away.
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But neighbor a obviously has an attachment to this dog, has an emotional attachment.
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So how do we solve this issue? well, the close theorem would say to let to neighbor a and neighbor b bargain over this problem.
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And what this would look like would be maybe, for example, neighbor b offering $500 to neighbor a to get rid of the dog or having to offer more and more until the neighbor a agrees.
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So this is the kind of bargaining that the cos theorem is talking about.
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And through bargaining, private parties can solve externalities by themselves...