Question

Value of Clean air to me = $5 • Value of smoking a cigarette to her...

Value of Clean air to me = $5

• Value of smoking a cigarette to her = $1

– What is the efficient outcome if I have the right to clean air?

– What is the efficient outcome if she has the right to smoke?

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Answer #1

If I have the right to clean air and she is smoking, then the efficient outcome will result in no smoking. This is because I value clean air more than what she can pay me for buying the rights. She can maximum pay $1 for buying the rights but I want a minimum of $5 which is my valuation. Here bargaining fails and no smoking occurs

If she has a right to smoke, I would be willing to pay a maximum of $5 for not letting her smoke while she will be willing to given me the rights to clean air for $1. Here any bargaining price between $1 and $5 will result in an outcome where no smoking occurs.

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