Question

suppose the law says that jones may not emit smoke from his factory unless he gets permission from smith who lives downwind. the relevant costs and benefits of filtering the smoke from jones production process are as shown in the following table:

Jones emits smoke:

Surplus for jones-$200

Surplus for Smith-$400

Jones doe not emit smoke:

Surplus for jones-$160

Surplus for Smith-$420

If jones and smith can negotiate with one another at no cost will Jones emit smoke?

Answer 1

The most efficient outcome is for Jones to emit smoke. The reason is that the total daily surplus in that situation will be £600 in comparison to only £580 when Jones does not emit smoke. Since Smith has the right to insist that Jones emit no smoke, Jones will have to compensate Smith for not exercising that right. When Jones pays Smith £30, then both will be £10 better off than if Smith had forced Jones not to emit smoke

	Jones emits smoke (£)	Jones does not emit smoke (£)
Surplus for Jones	200-30 = 170	160
Surplus for Smith	400 + 30 = 430	420