Here are two scenarios: Scenario 1: If Tom\'s marginal benefit from a cigar a da

Question

Here are two scenarios: Scenario 1: If Tom's marginal benefit from a cigar a day is S20 and Larry's marginal benefit from a smoke-free environment is $25 a day, what is the efficient outcome if they meet at Tom's home? What is the efficient outcome if they meet at Larry's home? Scenario 2: If Tom's marginal benefit from a cigar a day is $25 and Larry's marginal benefit from a smoke-free environment is $20 a day, what is the efficient outcome if they meet at Tom's home? What is the efficient outcome if they meet at Larry's home? Comment using the concepts of property rights, Coase theorem and compare efficiency in scenario 1 and scenario 2. Does it matter who has the property right?. 1.

Explanation / Answer

In scenario 1, since marginal benefit from smoke to Tom=20 and for free smoke free environment, marginal benefit to Larry is 25. Thus it is better for the society to have a smoke free environment

In scenario 2, the marginal benefit from smoke to tom is greater than marginal benefit from smoke free environment to Larry leading to efficient to have smoke.

According to coase theorem, property right doesnot have any effect on efficient outcome because it says if there is free negotiation between two parties then independent of who have the property right, efficient outcome is achieved.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.