Varian (2014, Ch. 35, Section 1) discusses the effects of a tobacco smoking externality in a model that was also studied in class. In this model:

		Trading between money and smoke concentration in the house can potentially improve the utility of both room-mates. In line with Coase Theorem, for that to occur we need well-defined property rights (i.e. rules and punishments for not following the rules) and the initial allocation of rights to smoke (e.g. tradable permits that can be use to smoke) can be given to either the smoker or non-smoker.
		Trading between money and smoke concentration in the house can potentially improve the utility of both room-mates. In line with Coase Theorem, for that to occur we need well-defined property rights (i.e. rules and punishments for not following the rules) and the initial allocation of rights to smoke (e.g. tradable permits that can be use to smoke) has to be given be given to the smoker (if they are given to the non-smoker, no trade would ever take place).
		Trading between money and smoke concentration in the house can potentially improve the utility of both room-mates. In line with Coase Theorem, for that to occur we need well-defined property rights (i.e. rules and punishments for not following the rules) and the initial allocation of rights to smoke (e.g. tradable permits that can be use to smoke) has to be given be given to the non-smoker (if they are given to the smoker, no trade would ever take place).
		Trading between money and smoke concentration in the house can potentially improve the utility of both room-mates. In line with Coase Theorem, for that to occur we need well-defined property rights (i.e. rules and punishments for not following the rules) and the addition of rights to smoke (e.g. tradable permits that can be use to smoke) that have to be purchased from a government authority.

Give explanation