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Total Costs Determinations

Smith can operate his saw mill with or without soundproofing. Operation without soundproofing results in noise damage to his neighbor Jones. The relevant gains and loses for Smith and Jones are listed in the table:

Without soundproofing
With soundproofing

Gains to Smith...........................$150/week
$34/week

Damages To Jones.....................$125/week
$6/week

a. If Smith is not liable for noise damage and there are no negotiation costs, will he install sunproofing? Explain.....
b. How, if at all, would your answer differ if the negotiation costs of maintaining an agreement were $4/week? Explain.....
c. Now suppose Jones can escape the noise damage by moving to
a new location, which will cost him $120/week. With negotiation costs again assumed to be zero, how, if at all, will your answer to part (a) differ? Explain.....

Solution Preview

a. If Smith is not liable for noise damage and there are no negotiation costs, will he install soundproofing? Explain.....
Negotiation costs = 0
The cost of soundproofing for Smith = 150-34 = $116 per week
Benefits of soundproofing to Jones = 125-6=$119 per week
Cost of soundproofing to Smith ($116 per week) is less than benefits to Jones ($119) and there are no negotiation costs. There is a net benefit of $3 per week for installing the soundproofing. Both can negotiate to split the net benefit in any manner ...

Solution Summary

Total Costs Determinations are achieved.

$2.19