A and B live in neighboring apartments with two commodities,money and smoke (from cigarettes). For A, both money and smoke aregood, and he is endowed with $eA. For B money is good but smoke isbad. He is endowed with $eB. Smoke is measured on a scale from 0(none) to 1 (too difficult to breathe). Assume both agents havewell-behaved preferences. (a) Use the Edgeworth box with money onthe horizontal axis and smoke on the vertical. Where are all theefficient allocations of noise and money? Is the initial allocationefficient? Explain. (b) Assume that B is assigned the property ofthe smoke pollution, thus he can sell â€the rights to smokepollutionâ€. Will there be any smoke pollution? If so, how muchpollution and what will be the price for this amount of smokepollution? What important economic proposition just has beenverified? (c) Suppose that A has the property rights to smokepollution but B is unable to make a deal with A due to transactioncosts. The landlord proposes a fee for every hour A smokes. Is Agoing to change his behavior in response to this fee? Explain.
