Groucho smokes; Harpo hates smoke. Groucho has the right to smoke, and he curren

Question

Groucho smokes; Harpo hates smoke. Groucho has the right to smoke, and he currently smokes 12 cigars per day. He faces marginal costs of reducing smoking (withdrawal pains) equal to $x, where x is the number of cigars reduced. In other words, the cost of giving up the first cigar is $1, the second, $2, and so forth. Harpo receives marginal benefits (reduced discomfort and risk of cancer) equal to $(12-x) from Groucho reducing the number of cigars smoked. Now assume their boss reduces Harpo’s wages. Harpo cannot afford to pay Groucho more than $30 a day to reduce the amount of smoking in their office. How many cigars will Groucho smoke now, given this increased inequality? How much money will Groucho charge Harpo for this reduction in smoking? Is the new outcome efficient?

Explanation / Answer

In case of no constraint .

the optimal smoking will be till

MSC to Goucho = MSB to harper

X = 12 - X

X = 12/2 = 6

So, optimal number of cigars reduced = 6

and the money recieved by Goucho = 6*6 = $36

Now, there is constraint of Budget = $30

So, Goucho will smoke now = 5 Cigars

Money charged by Goucho = $5*5 = $25

No, this new outcome is n't efficient as

here MSC to Goucho is n't equal to MSB to Harper

MSC = Marginal Social cost

MSB = Marginal Social Benefit

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