Answer to Question #50609 in Microeconomics for IGA

Question

Suppose that Ian and Mike are cottagers on opposite sides of a small lake. Ian values electricity at his cottage at $500 and Mike at $700, but in order to get electricity for their properties a trunk line costing $1000 must be built. If they are unable to negotiate the trunk line will never be built, but if they can costlessly negotiate to split the costs, it will be built.

Answer 1

If Ian and Mike are cottagers on opposite sides of a small lake, and if Ian values electricity at his cottage at $500 and Mike at $700, but in order to get electricity for their properties a trunk line costing $1000 must be built. If they can costlessly negotiate to split the costs, Ian should pay 500/(700 + 500) = $417, and Mike should pay 700/(700 + 500) = $593.