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I have the following question about externalities.

Suppose that a company is planning to construct a building next to your house which will limit your access to the street. This will force you to spend £50,000 for a new access unless the company changes the construction layout. The change in layout will cost the company £100,000. Assume there are no transaction costs.

I. if you are liable the new access will cost you £50,000

II. if the company is liable they will agree to pay you up to £100,000

My approach: I think the liable parties should pay enough to cover the negative externalities. Hence, I thought the answer should be company should pay £50,000 if they are liable and house owner should pay £100,000 if he/she is liable. However, answer is the opposite as given above. I thought the answer could be wrong, yet I am not sure about my approach as well. What do you think?

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  • $\begingroup$ well what is actually the question? Is the question asking you about what you think should happen, or what would you do if you were benevolent dictator, or what would actually happen in each situation? $\endgroup$
    – 1muflon1
    Jul 4, 2021 at 17:31
  • $\begingroup$ Question directly asks which of the following are correct, there are two more options, up to IV, and the correct answers are given in the main post. $\endgroup$
    – madetolast
    Jul 4, 2021 at 18:24
  • $\begingroup$ Is your class focused on the Coase theorem? $\endgroup$
    – EB3112
    Jul 4, 2021 at 20:34
  • $\begingroup$ @madetolast well as the question is written above there must be some missing context on its own that’s not enough information to arrive at solution as you can approach this from various angles with various models, your professor might assume that you know what model to use based on your classes $\endgroup$
    – 1muflon1
    Jul 4, 2021 at 21:20
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    $\begingroup$ If you are liable then that means you have to pay for the new access yourself. Why would you give the company extra money?? You can pay them 100k to alter their plans or you can spend 50k yourself to build a new access. Why would you waste an extra 50k...? $\endgroup$ Jul 5, 2021 at 9:53

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