Question

A and B live in neighboring apartments with two commodities, money and smoke (from cigarettes). For A, both money and smoke are good, and he is endowed with $eA. For B money is good but smoke is bad. He is endowed with $eB. Smoke is measured on a scale from 0 (none) to 1 (too difficult to breathe). Assume both agents have well-behaved preferences. (a) Use the Edgeworth box with money on the horizontal axis and smoke on the vertical. Where are all the efficient allocations of noise and money? Is the initial allocation efficient? Explain. (b) Assume that B is assigned the property of the smoke pollution, thus he can sell ”the rights to smoke pollution”. Will there be any smoke pollution? If so, how much pollution and what will be the price for this amount of smoke pollution? What important economic proposition just has been verified? (c) Suppose that A has the property rights to smoke pollution but B is unable to make a deal with A due to transaction costs. The landlord proposes a fee for every hour A smokes. Is A going to change his behavior in response to this fee? Explain.

Answer 1

Question :live in neighboring apartments with two commodities, money and smoke (from cigarettes). For A, both money and smoke are good, and he is endowed with $eA. For B money is good but smoke is bad. He is endowed with $eB. Smoke is measured on a scale from 0 (none) to 1 (too difficult to breathe). Assume both agents have well-behaved preferences. (a) Use the Edgeworth box with money on the horizontal axis and smoke on the vertical. Where are all the efficient allocations of noise and money? Is the initial allocation efficient? Explain. (b) Assume that B is assigned the property of the smoke pollution, thus he can sell ”the rights to smoke pollution”. Will there be any smoke pollution? If so, how much pollution and what will be the price for this amount of smoke pollution? What important economic proposition just has been verified? (c) Suppose that A has the property rights to smoke pollution but B is unable to make a deal with A due to transaction costs. The landlord proposes a fee for every hour A smokes. Is A going to change his behavior in response to this fee? Explain.

Answer: yes there is efficient allocation for both the A and B neighbors. Diagram is given below.

In the diagram the tangent which touches both the curve is the efficient allocation of resources.

Here from the value given in the above question B is assigned the property rights of smoke pollution and he is endowned with $ eB. He can sell his right at $eB and there will be pollution equal to the amount of right of pollution generation.

Answer : if A have to pay fees for generating pollution than to avoid paying fees he can do one thing is not to generate pollution.

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