Andy owns a Candy factory with noisy machines which disturb his neighbor Barb. Andy profits from running his noisy factory by A =100,000. Producing candy without making noise would be costly for Andy - if Andy were forced to run his factory silently, the profits of the factory would fall by 60,000 so he would only make a profit of 40,000. Otherwise, Andy could just shut down his factory entirely and earn nothing. Barb gets a payoff of B =70,000 from a quiet neighborhood. She will get a payoff of zero (B =0) if she has to endure Andy's noise. Barb could wear earplugs, but that discomfort and inconvenience would leave her with a payoff of only B =20,000.

Suppose Andy has a property right to be noisy if he wants. He is not required to compensate Barb. Without bargaining, Andy will choose to [ Select ] and Barb will choose to [ Select ]