Question: 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

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:

With filter Without filter $245/wk Gains to Smith Damage to Jones $200/wk $35/wk $85/wk

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.

With filter Without filter $245/wk Gains to Smith Damage to Jones $200/wk $35/wk $85/wk

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