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. Declaring the card room a non-smoking area with no opportunity to negotiate would:
A)decrease total economic surplus.
B)increase total economic surplus.
C)leave total economic surplus unchanged, but redistribute benefits.
D)efficiently solve the externality problem.

Question

Quizplus · Accepted Answer

Because there is an opportunity for a negotiated trade that led to surplus, banning all smoking reduces total economic surplus.

Suppose There Are Ten People Playing Cards in a Room