Externality of appealing music

Consider the following scenario:

Suppose that a cafe enjoys a large increase in customers whenever the jazz dub next door features a band playing appealing music, because it can be easily heard from the cafe. The jazz club owner decides to purchase the cafe so that he can internalize this positive externality.

  1. Which of the following types of private solutions to the externality of appealing music has occurred in this case?
    a. Contracts
    b. Charities
    c. Moral codes and social sanctions
    d. Integration of different types of businesses through merger or acquisition
  2. It’s important to note that sometimes private solutions to externalities do not work. For example, this occurs when one party repeatedly holds out for a better deal.

Sample Solution