Saturday, 2 April 2016

Dealing with squealing children, NSW edition

I've written a couple of posts in the past about dealing with the problem of squealing children (see here and here). When I read this article last month, I thought it was time to write another. From the article:
A SYDNEY mum is furious after receiving a letter from her apartment building strata company threatening her with legal action unless she can stop her toddler from creating “excessive noise”...
In the letter, which Ms Mayer posted to Facebook over the weekend, the strata company says it has received reports from her neighbours of “shouting and screaming”, disturbing other residents and putting her in breach of the strata scheme by-laws.
Squealing (or shouting and screaming) children is a classic negative externality - an uncompensated impact of the actions of one party on a bystander. The poor residents of the apartment block face a cost that is imposed on them by the actions of the child (shouting and screaming create noise pollution). Since the child has no incentive to take into account the costs that they are imposing on the apartment residents, they generate too much noise compared to the socially efficient optimum.

How can the externality problem be solved? One solution is proposed by The Coase Theorem, which tells us that, if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own (i.e. without government intervention, or the intervention of the building strata company in this case).

However, a bargaining solution is unlikely to work for the apartment building, because it would require the child (or rather their mother) to enter into an arrangement with each of the other residents of the apartment (separately or all together). We know that bargaining solutions break down (or fail to arise) when there are many parties to the bargaining - either because of coordination problems, or because one or more parties may try to hold out against a solution, in order to get a better deal for themselves (what we refer to as a 'hold-out minority').

Instead, the apartment in the story uses a command-and-control policy - a rule against excessive noise, which if breached results in a penalty of $550 for the perpetrator (or in this case, their parent). This solution is based on the "polluter pays principle". Under this principle, the party that is responsible for the pollution is solely responsible for making restitution for the damage they cause.

However, the polluter pays principle is not always the best solution to problems of negative externalities. That is because there may be other ways of solving the problem that involve a lower cost (as I have argued before). Following this 'least cost principle', instead of imposing fines on parents for their noisy children (which would be an ongoing cost to the parents), perhaps the apartments could be better sound-proofed. That would only entail a one-off cost, and although that cost might be high initially, it would also reduce the problems of externalities from neighbours who enjoy loud dinner parties or other loud activities. Avoiding those other activities entails an ongoing cost that may be more costly overall.

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