Question

Firm Alpha can leave its windows uncovered or pay to install shutters on its windows. Whether the shutters are installed affects Firm Beta's profit, as illustrated in the table below.

1. Does the shutter installation create a positive or negative externality? Explain.

2. Is it efficient for the shutters to be installed? Explain.

3. Suppose that Firm Alpha has property rights. What will happen if the firms negotiate?

4. Suppose that Firm Beta has property rights. What will happen if the firms negotiate?

5. Relate your answers above to the Coase Theorem.

	Firm Alpha Profit	Firm Beta Profit
Alpha does not install shutters	$800	$200
Alpha installs shutters	$700	$500