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Smoking and the Coase theorem

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Bob and Dexter share a dorm room. Bob is a smoker but Dexter does not smoke. There are no laws that prohibit smoking in the dorm rooms. The benefit of smoking is worth $250 to Bob, but the smoke imposes a $500 cost on Dexter. How might the Coase theorem be used to achieve an efficient outcome in this situation? In your answer, be sure to define the Coase theorem, and the conditions under which the Coase theorem may work.

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Solution Summary

The Coase theorem is applied to a smoker in a dorm room.

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The Coase theorem posits that the correct allocation of property rights can help create economic efficiency. When externalities are present the market can over or under allocate resources to goods, resulting in inefficiency. For example, companies pollute because they feel they are entitled to use the environment as they need. Those who live nearby feel they own the water and air, at least to the extent that that need it to be clean. If the environment were allocated in a way that both ...

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