Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs?
A)Sam continues to smoke because he has a right to smoke in the smoking section.
B)Charles offers Sam between $15 and $40 not to smoke. Sam accepts, and both parties are better off.
C)Charles offers Sam between $15 and $40 not to smoke. Sam declines because he has a right to smoke in the smoking section.
D)Only a government policy banning smoking in restaurants will solve this problem.

Question

Quizplus · Accepted Answer

In an efficient solution, both parties should be able to benefit. Charles values the absence of smoke more than the cost of paying Sam to not smoke, while Sam values the ability to smoke lower than the money offered by Charles. Therefore, Charles can offer Sam between $15 and $40 not to smoke, and Sam would accept the offer. This solution satisfies both parties and is efficient.

Suppose That Charles Wants to Dine at a Fancy Restaurant