Question

1. Two people work together in the same office. One smokes and the other can’t stand smoke. The person who smokes derives the following marginal benefit from smoking MBA(x) = 12 – x, where x is measured in cigarettes per day. The other person faces marginal costs of breathing smoke from cigarettes MCB(x) = x. It is possible to rent a “clean air” machine that reduces smoke from cigarettes in the air by 50% for $10 per day. It is also possible to rent out an additional office for $40 per day so the non-smoker would not have to breathe smoke at all. a. What is the efficient outcome to this problem? b. Why would Coase argue that the efficient outcome would be achieved in this case regardless of whether or not there was a liability rule that made the smoker pay for damages suffered by the non-smoker?

Answer 1