Question

Consider two agents, student and professor living in the adjacent houses

and two commodities, money and music noise. For student both music noise

and money are goods and he is endowed with $mS. For professor money

is a good though noise is a bad. She is endowed with $mP . Music noise is

measured on a scale from 0 (silence) to 1 (point of deafness). Assume both

agents have well behaved preferences.


(a) Use the Edgeworth box with money on the horizontal axis and noise

on the vertical. Where are all the efficient allocations of noise and

money? Is the initial allocation efficient? Inefficient? Discuss.


(b) Assume that professor is assigned the property of the noise pollution,

thus she can sell ”the rights to noise pollute”. Will there be any noise

pollution? If so, how much of pollution and what will be the price for

this amount of noise pollution? What important economic proposition

just has been verified?

Answer 1

(a) All the efficient allocations of noise and money are on the vertical axis. The initial allocation is inefficient.

(b) There will be some amount of noise pollution, because the profeasor will substitute it for money by selling rights to create this noise.