Recently, my friend Bella asked me whether it is worth it to pay an extra $10 rent for the balcony I immediately replied “I would even give up $50 because the marginal utility of balcony is very high for me”. I think everyone would be willing to bear the $10 cost because the MC of living in an apartment without a balcony outweighs this cost considerably.
Bella is moving to an apartment with her three other friends. She and two of her friends easily agreed to pay the extra ten bucks for the apartment. However, one of her friends, Caroline, refused to pay that cost which makes the situation complicated. This group of four people is really good friends so the MC of excluding Caroline and moving to a three-bedroom apartment is highly costly. Therefore, this is not an option.
When Bella asked me how to resolve this situation, Coase’s theory came to my mind. When I asked her how much she would be willing to pay to get the balcony, I got the answer of “as far as $20”. Thus the situation would be easily solved if Bella would be willing to cover Caroline’s balcony fee as well. Unfortunately, this situation was not that simple. The reason why Caroline didn’t agree to move to an apartment with a balcony was stemming from her fear of heights which is much more costly than the $10 fee. As a result, the MC of Caroline is higher than the MB of Bella and her two friends. Hence, they end up moving to an apartment without a balcony and bear the cost caused by Caroline out of their love for her (which may not be valued by any currency).
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