Wine&Beer Fest

Back in Guayaquil, EC the building where I live is located right in front of the local theater. The theater hosts different types of events that range from music and food festivals to children entertainment on weekends. These events take place in the open parking lot, which implies that noise cannot be contained and cars have to park on the streets surrounding the theater, blocking the way for regular transit. Residents in my building are affected by the noise that goes on until late hours in the evening, and by the overflow of cars in the streets that often block the entrance to the building. These two effects are negative production externalities. They impose a cost to the residents that is not accounted for by the producers, leading to a MSC that is above the PMC and therefore results in an overproduction of the good (events in the theater parking lot).

Last week all residents in my building received a letter from the representatives of the “Wine & Beer Fest” that is scheduled to take place in the theater parking lot in October. Their permission to have the festival was denied by the mayor due to repetitive noise and traffic complaints by the building’s residents. This letter is a clear example of a Coasian solution for a negative externality. In the letter, the representatives of the festivals request the residents to cooperate with them in order to reach a “favorable” solution. They mention various arrangements they would be willing to make for the residents to withdraw their complaints. These include: rescheduling the event to an earlier time in the evening, request the presence of more transit officers to ensure the clearing of roads, providing VIP tickets to all residents of the building and any other suggestion or request.

This situation shows not only a negative production externality problem but also the role of government, and a possible solution. The negative production externality created by the festival would be the noise and traffic that residents in the area have to endure when these event takes place. The role of government is clear; they assigned property rights to the residents when denying the permit to the festival. But, as proposed by Coase, the government does not impede the negotiation between the two parties involved. The producers are trying to negotiate a solution with the residents by modifying their production. By doing so, they are internalizing the externality by accounting for these costs. For example, all the VIP passes given out for free are added to the company’s costs. This internalization of the externality raises the PMC to the SMC solving the externality problem. Residents agreed to these terms and tickets for the festival are now on sale!