Reference no: EM132667695

A popular idea in economics (based on the so-called Coase Theorem) is that regardless of goods are allocated in an economy, people will trade their way to an efficient equilibrium. For instance, if there is one good and two agents, then no matter who starts by owning the good, the good will eventually be owned by the person who values it the most. In this problem we revisit this idea in the context of loss-aversion. Suppose there is a free concert that takes place every year, and agent A (resp. agent B) gets $50 (resp. $60) worth of utility from attending that concert in any year. The tickets to the concert are in excess demand every year. In 2018, agent A managed to get the ticket from the ticket office while agent B did not, and in 2019, B managed to get the ticket from the ticket office and A did not. A trade takes place if the holder of a ticket is willing to part with the ticket for a price that the buyer is willing to pay.

(a) From the perspective of standard theory (where the utility of an alternative is measured in dollar terms and any dollar payments are subtracted from it), what is the range of prices (if there exists any) in 2018 at which A and B will be willing to trade? What is the corresponding range in 2019? For each of these years, say whether trade will take place and say who will end up with the ticket.

(b) Suppose instead that the agents are reference-dependent and loss averse, in that the ticket-holder looks forward to attending the concert and incurs a $20 disutility if he does not end up going, while the agent who does not have the ticket expects not to go and experiences no loss if he does not end up going. Redo the analysis in part (a).