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Smith can operate his saw mill with or without soundproofing. Operation without soundproofing results in noise damage to his neighbor Jones.

Smith can operate his saw mill with or without soundproofing. Operation without soundproofing results in noise damage to his neighbor Jones. The relevant gains and loses for Smith and Jones are listed in the table:
Without soundproofing    
               With soundproofing
   Gains to Smith...........................$150/week                        
               $34/week
   Damages To Jones.....................$125/week                            
           $6/week
     a.     If Smith is not liable for noise damage and there are no negotiation costs, will he install sunproofing?    Explain.....
     b.     How, if at all, would your answer differ if the negotiation costs of maintaining an agreement were $4/week?   Explain.....
     c.     Now suppose Jones can escape the noise damage by moving to
a new location, which will cost him $120/week.   With negotiation costs again assumed to be zero, how, if at all, will your answer to part (a) differ? Explain.....

This question was asked on Apr 28, 2010.

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