1. Smith can produce with or without a filter on his smokestack. Production without a filter results in greater smoke damage to Jones. The relevant gains and losses for the two individuals are listed in the table below. With filter Without filter Gains to Smith $245 $245 Damage to Jones $35 $85 a) If Smith is not liable for smoke damage, there are no negotiation costs, and the filter costs $45, what will be the outcome? Will the filter be installed? If yes, who pays for it? b) How, if at all, would the outcome be different if Smith were liable for all smoke damage and the cost of the filter were $55?

1. Smith can produce with or without a filter on his smokestack. Production without a filter results in greater smoke damage to Jones. The relevant gains and losses for the two individuals are listed in the table below. With filter Without filter Gains to Smith $245 $245 Damage to Jones $35 $85 a) If Smith is not liable for smoke damage, there are no negotiation costs, and the filter costs $45, what will be the outcome? Will the filter be installed? If yes, who pays for it? b) How, if at all, would the outcome be different if Smith were liable for all smoke damage and the cost of the filter were $55?

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 5PA

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