IV. Airplanes make noise that disturbs residents of homes near the flight path. Suppose that the airline can, at some cost, reduce the noise to an insignificant level. Home owners can get the same reduction by soundproofing their homes. For simplicity ignore the possiblity of different levels of noise reduction--there either is or is not a noise problem.
There is one airline; it owns the airport. There are two thousand homes near the flight path. Reducing noise costs the airline a million dollars a year. Sound proofing a house costs $400/year. Airport noise (if there is neither soundproofing nor noise reduction by the airline) reduces the value of the house to its owner by $600/year
A. What is the efficient solution?The airline should (reduce/not reduce) noise:
The homeowners should (soundproof/not soundproof:
Cost of soundproofing: $800,000/yr
Cost of noise reduction: $1,000,000/yr
Cost of doing nothing: $1,200,000/yr
Note that the question did not specify what the property rights were, since that is irrelevant to which solution is efficient.
In answering parts B and C, describe first what happens if there is no bargaining between airline and homeowners, and then whether bargaining will change the outcome. Explain briefly.
B. The airline has no legal obligation to reduce noise.
No bargaining. The airline doesn't reduce (no incentive to do so), the homeowners do soundproof ($400<$600)
With bargaining, the outcome remains the same, since even if the homeowners could overcome the public good problem of raising the money to pay the airline to reduce noise, it wouldn't pay them to offer more than $800,000, which the airline would not accept.
C. Each homeowner has the right to a reasonable level of quiet, so if the airline does not reduce noise, it must pay each home owner for any resulting reduction in the value of his house.
No bargaining: If the airline doesn't reduce, it must pay $1,200,000/year in fines. So the airline reduces noise.
With bargaining: The airline offers each homeowner $400/year + a little to soundproof, for a total of less than $1,000,000/year. Any homeowner who refuses gets $600/damages. Since accepting the offer makes the homeowner somewhat better off, each homeowner accepts.