Reference no: EM132415540

Problem 1: Property Rights and Bargaining Costs. Al owns a shoe factory with noisy machines which disturb his neighbor Bob.

The value of the factory is $1,000,000. Producing shoes without making noise would be much more costly - if Al were forced to run his factory silently, the value of the factory would fall to $400,000. It is estimated that the harm done to Bob (having to endure the noise) is $100,000.

a) What is the efficient outcome - for the factory to shut down, to run silently, or to run noisily?

b) Suppose Bob was granted an injunction to stop the factory from making noise. i If Bob enforced the injunction, Al would have to run the factory silently. What would be Al's, and Bob's, payoffs? ii How much would Al be willing to pay Bob not to enforce the injunction?

c) Suppose instead that Al were required to pay Bob damages if he wanted to continue making noise. What level of damages "make the plaintiff whole"?

d) What does the Coase Theorem say about the two remedies when there are no bargaining costs?

e) Which remedy is more efficient when bargaining costs are high and bargaining is unlikely to succeed? Why?