Question

Jason Lumberpond likes to drive his solid-gold rocket car back and forth in front of his house. The loud noise from the rocket engines imposes a loss equal to $L on his neighbors. There are two possible ways to avoid that loss. Jason can install an expensive muffler, or the neighbors can install soundproofing on their houses. The muffler costs $C and the soundproofing costs $E.

Suppose that E > L > C. Suppose that the neighbors have a liability right over installing the muffler. That is, Jason chooses whether or not to install the muffler, but he has to compensate the neighbors for the consequences of his choice. However, there are litigation problems. In particular, the court mistakenly believes that the loss that the neighbors suffer from the noise is only $C/2. There are also bargaining problems: Jason's bodyguards do not allow the neighbors to get close enough to negotiate with him. What outcome do we expect?

a. Jason does not install the muffler, the neighbors install soundproofing, and no payment is made.

b.Jason installs the muffler, the neighbors do not install soundproofing, and Jason pays C/2 in damages to the neighbors.

c. Jason installs the muffler, the neighbors do not install soundproofing, no payment is made.

d.The neighbors pay Jason an amount between C and L to install the muffler, the neighbors do not install soundproofing.

e.Jason does not install the muffler, the neighbors do not install soundproofing, and Jason pays C/2 in damages to the neighbors.

Answer 1

loss the loud is imposing from rocket engine is L

Muffler Cost is C

Sound proofing costs is E.

Given that E>L>C. ----1

Also whether Jason chooses to install muffler or not he has to compensate the neighbors for the consequence.

Also the court believes that the loss that the neighbors suffer from the noise is only C/2 which is far less from what they actually suffer.

From equation 1 it is being noticed that since the cost of installing the muffler is less than the loss, Jason may think of installing it and since the cost of installing sound proofing is more than the loss that is occurring, the neighbors would not be interested in installing it.

Thus from the given choices option B is best suited.

Thus,  Jason installs the muffler, the neighbors do not install soundproofing, and Jason pays C/2 in damages to the neighbors.

This is so because it is cheaper for Jason to install muffler than the neighbors and since he is liable to compensate the neighbors he pays an amount equal to C/2 since the court mistaken's it less.