consumption externality

Question 1

assumptions

Answer 1

Competitive behaviour
Two individuals A and B
Cigarettes and a good
Assume B’s utility function can be split in 2
non individualistic preferences
unit of cigarette (c) = unit of pollution (s)

Question 2

B’s utility function

Answer 2

Split into utility from the good and disutility from the pollution

Question 3

non tradeable property rights

Answer 3

inefficient solution. Can be shown to be an allocation that pareto dominates it. MRSa > MRSb

Question 4

price of property right

Answer 4

ps. Note this result in an efficient outcome.

Question 5

graph axis

Answer 5

Consumption good as x axis
Cigarettes/pollution as y axis

Question 6

MRS(g,c)

Answer 6

Ug / Uc