At Universal Studios Hollywood, a new, state of the art roller coaster has just finished construction. While the roller coaster has created a lot of hype for the amusement park, the screams generated from the ride are impacting how neighbors can use their property: a classic externality. As stated in Coase, however, there is a reciprocal nature to the problem. The reduction in sound will impose costs on Universal just as the current screams impose costs on the neighbors. In an attempt to internalize these costs, developers tried to reduce noise by installing “scream screens,” facing the cart away from private residences, and installing a 940-foot sound wall, but these efforts were still not enough to reduce the bloodcurdling screams from impacting neighbors.
When attempting to estimate the actual costs these screams are imposing on neighbors, the housing market of the surrounding area can be a good place to start. If these screams are inhibiting the use of this expensive property, the value of these homes could decrease, a cost that Universal does not bear. Correspondingly, there are other costs that are harder to measure numerically, like impeding on homeowners' ability to concentrate, which can be crucial as seen in Sturges v. Bridgman. On the other hand, if Universal had to drastically alter the ride, there could be lost revenue and angry consumers. It is also important to consider that the estimated $200 million dollar construction budget includes some of the sound prevention methods already considered, indicating that the sound technology is expensive and not a trivial cost.
From a Coasian perspective, Universal Studios Hollywood and the surrounding neighbors could attempt to resolve the issue privately. This could be done by Universal compensating the surrounding neighbors for the loss of home value, or the neighbors could pay Universal to shut down the roller coaster. In both situations, the number of parties creates issues and drives up transaction costs. If the neighbors agree to pay, there will inevitably be free riders who did not pay, but enjoy the quiet, and if Universal pays, there could be a holdout problem. Therefore, it is likely that government intervention will be required, unless Universal internalizes all of the screams independently.
