These smoking problems are a little silly but are good at illustrating some basi

Question

These smoking problems are a little silly but are good at illustrating some basic lessons about efficiency. So, this time, Groucho and Harpo work together in the same office. 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.

Assume that Groucho has the right to smoke in the office, but that Harpo can pay Groucho to smoke less. Can Groucho and Harpo come up with a deal that makes both individuals better off? How many cigars will Groucho smoke under this Coasean bargain? How much money will Groucho be able to charge Harpo for this reduction in smoking? Is this outcome efficient? Is it fair?

Explanation / Answer

Coase theorem suggests that a creator of a negative externality and the victim can achieve optimal levels of the harm it does on the victim if the property rights are clearly defined. Because the right to smoke-free air is not clearly defined, the victims cannot accuse the smokers. In the case where victims can acquire the right to have a smoke-free air, smokers can purchase the right or bargain

Here, Groucho has the right to smoke, and he currently smokes 12 cigars per day. The marginal costs of reducing smoking equal to $x, where x is the number of cigars reduced. Harpo receives marginal benefits (reduced discomfort and risk of cancer) equal to $(12-x) from Groucho reducing the number of cigars smoked.

If Groucho has the right to smoke in the office and Harpo can pay Groucho to smoke less, then Groucho and Harpo can come up with a deal that makes both individuals better off

Then the optimum bargaining will allow MC=MB to rule. This implies

12-x = x

12 = 2x

x = 6

This means as many as 6 cigars will Groucho smoke under this Coasean bargain. A total of $6 will be charged by Groucho from Harpo for this reduction in smoking? This outcome is fair and efficient as both are facing the true cost of their actions.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.