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1. Sometimes markets can correct for externalities because those who are harmed and those who benefit from an externality-inducing activity bargain

1. Sometimes markets can correct for externalities because those who are harmed and those who benefit from an externality-inducing activity bargain and come to agree on a mutually satisfying condition.
a) Explain the three conditions necessary for a market solution (that is, the Coase Theorem) [3 points]
b) Suppose there is a smoker and non-smoker sharing a room where there are no smoking restrictions, explain how the two individuals may bargain to reach a mutually agreeable consumption level and still share the room. [5 points]
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8385990-soln.doc

1. Sometimes markets can correct for externalities because those who are harmed and
those who benefit from an externality-inducing activity bargain and come to agree on a
mutually satisfying...

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