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. Productionwithout a filter results in greater smoke damage to Jones. The relevant gainsand losses for the two individuals are listed in the table below: LOWith i lter Without i lterGains to Smith $wk $wkDamage to Jones $wk $wka 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 allsmoke damage and the cost of the filter were $wk higher than indicatedin the table? Explain carefully
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