So, this time, Groucho and Harpo work together in the same office. Groucho smokes; Harpo hates smoke. Groucho has the right to smoke, and he…

So, this time, Groucho and Harpo work together in the same office. Groucho smokes; Harpo hates smoke. Groucho has the right to smoke, and he currently smokes 12 cigars per day. He faces marginal costs of reducing smoking (withdrawal pains) equal to $x, where x is the number of cigars reduced. In other words, the cost of giving up the first cigar is $1, the second, $2, and so forth. Harpo receives marginal benefits (reduced discomfort and risk of cancer) equal to $(12-x) from Groucho reducing the number of cigars smoked.

1. Draw a diagram showing the marginal costs and marginal benefits of pollution reduction; put the number of cigars reduced on the horizontal axis. Is it efficient for Groucho to smoke 12 cigars per day? Why or why not? Use this diagram to determine the efficient number of cigars for Groucho to smoke.

2. Assume that Groucho has the right to smoke in the office, but that Harpo can pay Groucho to smoke less. Can Groucho and Harpo come up with a deal that makes both individuals better off? How many cigars will Groucho smoke under this Coasean bargain? How much money will Groucho be able to charge Harpo for this reduction in smoking? Is this outcome efficient? Is it fair?

3. Now assume their boss reduces Harpo’s wages. Harpo cannot afford to pay Groucho more than $30 a day to reduce the amount of smoking in their office. How many cigars will Groucho smoke now, given this increased inequality? How much money will Groucho charge Harpo for this reduction in smoking? Is the new outcome efficient? Is it fair

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