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Abel shares an apartment with Tim. Abel drinks alcohol while Tim hates drinking. The utility functions for Abel (A) and Tim (T) are as follows:
= 300 + 90 - 5 3
= 300 - 90
Where x is the number of bottles of alcohol consumed by Abel on a daily basis (and UA includes the cost of alcohol)
a. Show that Abel will consume alcohol beyond the socially optimal level when the externality is ignored.
b. Find the optimal Pigovian tax needed to correct the externality
c. Discuss the outcome with Coasian bargaining when the property right is assigned to the Abel.
d. Discuss the outcome with Coasian bargaining when the property right is assigned to the Tim
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