Price Theory Puzzles: Externalities and Discrimination

Welcome to our first Price Theory Puzzle! In this series, we will pose questions for debate that build on previous newsletters (or are just fun puzzles that we steal from Alchian and Allen).

How it will work is that we will pose a question, and then we open it up for discussion among the readers. We will hop in with our thoughts too, but it is really a chance for a discussion. Today’s question builds on this week’s newsletter about externalities:

Economic Forces
Does Anyone Understand Externalities?
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College-age people tend to keep different hours, are more likely to have loud parties, and are less likely to maintain their homes and yards than older neighborhood residents. As far as the older neighborhood residents are concerned, college-aged neighbors impose a cost on the neighborhood, at least in expectation. However, preventing people from living in your neighborhood on the basis of their age is likely to violate anti-discrimination laws.

More generally, most people think that excess noise in one’s neighborhood imposes a cost. Many municipalities have noise ordinances that limit noise levels.

What does economic theory tell us about why you are able to discriminate against your neighbors on the basis of noise and not on the basis of age? We are looking for economic theories, not moral theories.