Answer to Question #111095 in Microeconomics for Jeff

Question

Consider two agents, student and professor living in the adjacent houses
and two commodities, money and music noise. For student both music noise
and money are goods and he is endowed with $mS. For professor money
is a good though noise is a bad. She is endowed with $mP . Music noise is
measured on a scale from 0 (silence) to 1 (point of deafness). Assume both
agents have well behaved preferences.

(a) Use the Edgeworth box with money on the horizontal axis and noise
on the vertical. Where are all the efficient allocations of noise and
money? Is the initial allocation efficient? Inefficient? Discuss.

(b) Assume that professor is assigned the property of the noise pollution,
thus she can sell ”the rights to noise pollute”. Will there be any noise
pollution? If so, how much of pollution and what will be the price for
this amount of noise pollution? What important economic proposition
just has been verified?

Answer 1

(a) All the efficient allocations of noise and money are on the vertical axis. The initial allocation is inefficient.

(b) There will be some amount of noise pollution, because the profeasor will substitute it for money by selling rights to create this noise.