Question

A physician and a confectioner are located in adjacent storefront offices. As part of his process for making candy, the confectioner uses a large blender that is very noisy and prevents the physician from effectively consulting with patients. (The blender is so loud that the physician cannot hear through her stethoscope when the blender is being used.) So, in the current situation, the physician’s value of production is 0, and the confectioner’s value of production is 400. If the confectioner does not operate, he earns 0 but the physician earns 2000. (a) Suppose that the confectioner has the legal right to operate his blender but that the parties are free to contract and have good external enforcement. Use the standard bargaining solution to predict the outcome under the assumption that the parties have equal bargaining weights. (b) Suppose that it is illegal for the confectioner to operate his blender without permission from the physician, but, again, the parties can freely contract and have good external enforcement. What would the outcome be in this case? Assume equal bargaining weights as before. (c) Suppose that the legal default is that the physician has the right to recover damages of z if the confectioner uses his blender. Determine what would happen if the parties do not contract, and note how this depends on z. Finally, describe the final payoffs, and whether the parties contract, as a function of z. Apply the standard bargaining solution with equal bargaining weights.

Answer 1

The on top of question is associate example of a negative position being caused by the confectioner's liquidiser.

a) maker has the right to control.

In this case, since the maker has the correct to control, he can operate his liquidiser associated earn an financial gain of four hundred. The phyician earns zero. However, since the rights square measure tradeable, the medical man offers to however the legal rights from the maker via a payment of cash lying between four hundred and 2000 bucks ( note that had there been no liquidiser, the medical man would have earned 2000 price of income). Thus, it's within the best interest of the medical man to pay the maker associate quantity bigger than four hundred however but 2000 bucks and build each of them at an advantage.

b) The medical man has the legal rights.

now, since it's extralegal for the maker to control while not the physician's permission, the maker would need to provide a payment of cash to the medical man to get the operation rights. The maker earns zero once there's no production and four hundred once there's production, whereas the doctor earns zero with production and 2000 otherwise. For any cut price to be stricken between them, the maker shoukd provide the medical man a total of 2000 bucks (atleast) to get the rights. However, if he will thus, he can wind up during a loss of 1600 (or more) bucks. Thus. although the rights square measure tradeable, no cut price may be stricken between the 2.

c) If the medical man incorporates a right to recover damages of quantity z, he would raise the maker to pay the quantity of damange his liquidiser created. If the parties contract, the maker would run into losses. And if the parties don't contract, the medical man would earn no financial gain. thus, whether or not any contract would manifest itself or not depends upon the quantity of z. As long as z<400, it'd be within the best interest of the maker to contract (even tho' the medical man still incurs a loss, however at a lesser quantity now). And if z>400, the maker wouldn't contract and thence no production takes place.

Thus, z<400 - conract

z=400 - hit (indifferent)

z>400 - no contract