Question

A confectioner (a candy maker) and a dentist run their business in two separate but adjacent
houses. The confectioner operates two loud machines in his house. The noise from the machines
had gone unnoticed for years until the neighboring dentist decided to move his office to the
room closest to where the confectioner operated his machines. The noise from the machines
makes the dentist’s work impossible. The dentist sues the confectioner in court.
Now, consider the following two scenarios:
Scenario 1: Suppose that the value of the dentist’s clinic is worth $130K,
whereas the value the confectioner’s candy business is worth $70K.
Scenario 2: Suppose that the value of the dentist’s clinic is worth $150K,
whereas the value the confectioner’s candy business is worth $180K.
Consider each of the scenarios above when answering the following questions. Assuming
that it is possible for either business to buy the other (i.e. to merge) or to buy the
nuisance rights after the court decision (i.e. the right to emit sound or to demand quiet),
what would be the outcome if…
a. …the court rules in favor of the confectioner, and transaction costs amount to
25K.
b. …the court rules in favor of the dentist, and transaction costs amount to $60K.

Answer 1

Scenario :1

value of dentist's clinic = $130,000

value of candy business = $70,000

assumption : either business can buy the other or buy the right to do what they are doing

a. court rules in favour of the confectioner , transaction cost = $ 25,000

confectioner has the right to make noise.

As dentist's worth is $130,000 , he can buy confectioner's business for $70,000 plus he will pay the transaction cost incurred by the confectioner i.e $25,000

now the dentist's value is $35,000 ($130,000 - $70,000 - $25,000) , and the confectioner will get 95,000 (70,000 + 25,000 i.e is the transaction cost)

b. court rules in favour of dentist, transaction cost = 60,000

confectioner can not make noise.

in order for the confectioner to continue his business he needs to compensiate the dentist with $130,000. But, confectioner 's value is $70,000 0nly .

in this case: confectioner will have to stop his business  

Scenario 2 :

value of dentist's clinic = $150,000

value of confectioner's business = $180,000

a. confectioner has the right.

in order for the dentist to buy the confectioner's business he has to pay $180,000, which he can not afford .

in this case : dentist will have to shut his office or move back

b. dentist has the right

in this case for confectioner to buy dentist's office , he will have to pay the $150,000 , which the confectioner can afford (as he his value is $180,000) but he will also have to pay the taxes , which is $60,00

adding up $60,000 + $150,000 = $210,000 , which is more than $180,000

confectioner will have to shut his business.