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Smith can produce with or without a filter on his smokestack. Production without a filter results in greater smoke damage to Jone. The relevant gains and losses are as follows: Gains to Smith: $200/wk with filter; $245/wk without filter. Damage to Jones: $35/wk with filter; $85/wk without filter.

a. If Smith is not liable for smoke damage and there are no negotiation costs, will he install a filter? Explain carefully.

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 $10/wk higher than indicated in the table? Explain carefully.

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9491309

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