In the US, mask wearing became a controversial issue among some groups of people. Consider the dilemma of an Uber driver transporting a passenger who doesnt want to wear a mask. Assume that Uber requires all drivers to wear masks, but they are debating option A (masks are mandatory for passengers) and option B (masks are voluntary for passengers). (Note that, if the passenger has a strong enough willingness to pay to avoid wearing a mask during a given ride, then it is theoretically possible that the efficient outcome for society is for the passenger to not wear a mask.)

Question 1: (75 word limit, 5 points) Suppose that Uber adopts a policy that masks are mandatory for passengers, but a passenger and a driver reach an agreement under which the passenger gives the driver an extra $5 tip in exchange for not wearing his/her mask. Claim: This deal represents a Pareto improvement for society as a whole. Evaluate this claim.

Question 2: (75 word limit, 5 points) Claim: As long as the passenger and driver are able to make a side agreement that Uber cannot observe, we can expect them to reach the outcome that maximizes their own welfare regardless of which policy Uber chooses. Evaluate this claim.