MGEC37H3 Lecture Notes - Marginal Utility, Marginal Cost, Market Failure
19 Nov 2012
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Two types of negotiations: no-smoking rule (non-smoker can enforce the rule) Markets will spring up to achieve results: smoker pays non-smoker s=. 05 to smoke 2 cigarettes/hour. But will not always be 100% even depends how has better bargaining power. Test of both parties being made better off: smoker is better off if . 60 s > 0, non-smoker is better off if s-sh. 50 > 0. *as long as $. 0. 50 < s < . 60 they both benefit. Negotiations: smokers are free to smoke. Markets always drive you to the most efficient outcome (2 cigarettes/hour) Non-smoker offers a bribe n to go to 2 cigarettes/hour. Condition of externality: no market springs up. Given zero transaction costs, property rights will end up in the hands of whoever values them the most: that is, the end result will be efficient, independent of the initial allocation of property rights.
