Microeconomics Chapter 16, Externality, Property Rights, and the Coase Theorem

3. Smith can operate his sawmill with or without soundproofing. Operation with out soundproofing results in noise damage to his neighbor Jones. The relevant gains and losses for Smith and Jones are listed in the table: (L03, L04) Without With soundproofing soundproofing Gains to Smith $ | 50/wk $34/wk Damage to jones $ | 25/wk $6/wk 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 maintain ing an agreement were $4/wk? Explain. C. Now suppose Jones can escape the noise damage by moving to a new loca tion, 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