3. Smith can operate his sawmill with or without soundproofing. Operation without soundproofing results in noise damage to his neighbor Jones. The relevant gains and losses for Smith and Jones are listed in the table:

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

b. How, if at all, would your answer differ if the negotiation costs of maintaining an agreement were $4/wk? Explain.

c. Now suppose Jones can escape the noise damage by moving to a new location, which will cost him $120/wk. With negotiation costs again assumed to be zero, how, if at all, will your answer to part

(a) differ? Explain.

Transcribed Image Text:

Without soundproofing With soundproofing $34/wk Gains to Smith $150/wk Damage to Jones $125/wk $6/wk