(a) Tim and James are neighbours in a flat.  Tim is a musician who likes to compose loud music at home while James is a full time student who needs a quiet environment to stay at home.  James consider the loud music from Tim as noise and disturb him in his study.  Assume that the music provides a benefit of $60 to Tim but cost James $90. 

(i)        If Tim is not liable for the noise and both parties can negotiate at no cost, what will be an efficient outcome?

(ii)       If the law requires Tim to observe silence and can only make noise with James approval and both parties can negotiate with no cost, what will be an efficient outcome?

(b) Consider a public good with only two consumers, A and B.  The demand function by Customer A is Q = 10 - 0.5P, while the demand function by Customer B is Q = Q = 10 - 0.25P, where Q is quantity demanded and P is price.  Construct the market demand curve for the public good.  If a company can produce the public good at a constant marginal cost of $30, what is the market equilibrium price and quantity of the public good? 

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Q1 a If Tim is not liable for loud music and both parties can negotiate at no cost then the efficien... View the full answer