Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then which of the following outcomes is consistent with the Coase theorem?
A)The cigar smoker will not be able to smoke because the majority of people in the room dislike the smell of cigar smoke.
B)The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking.
C)The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration.
D)The nine non-smokers will each pay the cigar smoker fifty cents and the cigar smoker will not smoke.

Question

Quizplus · Accepted Answer

According to the Coase theorem, if people can negotiate the purchase and sale of the right to perform activities that cause externalities, then they can always arrive at efficient solutions to the problems caused by externalities. In this case, it is socially optimal for the cigar smoker to smoke since the value to him of smoking is greater than the total value to the other nine people of clean air.

Suppose There Are Ten People Playing Cards in a Room