Smith can produce with or without a filter on his smokestack. Production without a filter results in greater smoke damage to Jones. The relevant gains and losses for the two individuals are listed in the table below:
a. If Smith is not liable for smoke damage and there are no negotiation costs, will he install a filter? Explain carefully.
b. How, if at all, would the outcome be different if Smith were liable for all smoke damage and the cost of the filter were $10/ wk higher than indicated in the table? Explain carefully.