Question

Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that

a. Jenny pays Abe $150 to give the dog to his parents who live on an isolated farm.
b. Abe pays Jenny $350 for her inconvenience.
c. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.
d. There is no private transaction that would improve this situation.

Answer 1

Answer: C - Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

Explanation: Since the benefit of owning the dog is worth $200 to Abe and Jenny is willing to pay him $300 to send the dog to his parents who lives on an isolated farm. Abe stand to gain an extra $100 above his initial benefit of keeping the dog for $200.