Ringo loves playing rock ‘n' roll music at high volume. Luciano loves opera and hates rock ‘n' roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.

a. What is the externality here?

b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome?

c. Suppose the landlord lets the tenants do what- ever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?