2. 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:

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.

Transcribed Image Text:

With filter Without filter Gains to Smith $200/wk $245/wk Damage to Jones $35/wk $85/wk