Suppose that Astro and Lee are two students at your university who are neighbors living in a duplex in two connected apartments. Astro is very studious and prefers that the building is quiet. Lee, on the other hand, likes to throw parties and prefers that the building is noisy. Suppose that on any given night the benefits to Astro of quiet are $200, and the benefits to Lee of throwing a noisy party are $475. One could also say that the costs to Astro of the party are-$200, and the costs to Lee of quiet are-$475. In the questions that follow, let's see what happens depending on the rules set by the owner of the apartment building.
Part 1. Suppose that the owner rules that the building must remain quiet at all times. Thus, Astro has a legal right to quiet. If this right cannot be negotiated, then the total net benefits to Astro and Lee are $__.
Part 2. Now suppose that the owner rules that residents are free to throw a party any time they wish. Thus, Lee has a legal right to party. If this right cannot be negotiated, then the total net benefits to Astro and Lee are $___.
Part 3 Now let's apply the insights from the Coase theorem. Suppose we go back to Part 1 when Astro had the right to quiet, but now assume that right can be negotiated so that Lee could buy the right and throw a party. Assume that the gains from trading that right are split equally. Lee could buy the right for $____.
