Suppose that Bill wants to dine at a fancy restaurant,but the only available table is in the smoking section.Bill dislikes the smell of cigarette smoke.He notices that only one person,Peter,is smoking in the smoking section.Bill values the absence of smoke at $15.Peter values the ability to smoke in the restaurant at $5.Which of the following represents an efficient solution in the absence of transaction costs?
A) Peter continues to smoke because he has a right to smoke in the smoking section.
B) Bill offers Peter between $5 and $15 not to smoke.Peter accepts,and both parties are better off.
C) Bill offers Peter between $5 and $15 not to smoke.Peter declines because he has a right to smoke in the smoking section.
D) Only a government policy banning smoking in restaurants will solve this problem.

Question

Quizplus · Accepted Answer

In this scenario, the efficient solution would be for Bill to offer Peter an amount between $5 and $15 not to smoke. This is because if Peter values smoking at $5 but Bill values the absence of smoke at $15, both parties can benefit if Peter is compensated to not smoke. This solution does not violate Peter's right to smoke in the smoking section and does not require any government intervention. Thus, option B is the best choice.

Suppose That Bill Wants to Dine at a Fancy Restaurant,but