Suppose that a smoker and a non-smoker are seated next to each other in a restaurant. This restaurant does not offer a non-smoking section. The smoker is indifferent between 1)smoking and 2)not smoking and consuming a $6 dessert. The non-smoker values being able to eat in a smoke-free environment at $10. According to the Coase Theorem, and assuming no bargaining costs, what will happen?
A)The smoker will continue to smoke because that is his right.
B)The smoker will stop smoking, just to be a nice guy.
C)The non-smoker will offer to pay the smoker between $6 and $10 to stop smoking, but the smoker will refuse because he has the right to smoke.
D)The non-smoker will offer to pay the smoker between $6 and $10 to stop smoking, and the smoker will accept the money and refrain from smoking.

Question

Quizplus · Accepted Answer

According to the Coase Theorem, in the absence of transaction costs, the initial allocation of property rights does not matter as long as property rights are well defined, transactions are costless and no externalities affect other parties. In this scenario, the smoker has the right to smoke, but this right imposes a negative externality on the non-smoker who values a smoke-free environment at $10. The non-smoker could potentially offer to pay the smoker to stop smoking, with a range between $6 and $10 being mutually beneficial for both parties. Since the smoker is indifferent between smoking and not smoking, they would be willing to accept an amount in that range to forgo smoking. Thus, the non-smoker could pay the smoker within that range, and the smoker would agree to stop smoking, leading to an efficient outcome where both parties gain from the transaction. According to the Coase Theorem, as long as there are no bargaining costs, the initial allocation of property rights does not matter and the parties can negotiate a mutually beneficial outcome. In this case, the non-smoker values a smoke-free environment more than the smoker values smoking. Therefore, it is likely that the non-smoker will offer to pay the smoker between $6 and $10 to stop smoking, and the smoker will accept the money and refrain from smoking. This outcome is mutually beneficial and efficient, as it maximizes the joint value of the two parties.

Suppose That a Smoker and a Non-Smoker Are Seated Next