Question

1. Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander’s stereo, bears a $350 cost from the noise. What is the socially optimal solution? If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement? Show all your work

Answer 1

Alexander would enhance his stereo playing for 100 dollars more. Mary would pay a lawyer 100$

Step-by-step explanation:

Socially optimal solution is the situation where all external costs are taken into account, as well as internal costs and benefits. Therefore, If Alexander's benefits from playing the stereo is 250 dollars and Mary's costs are 350 dollars, than in order to get socially optimal solutions, Alexander could enhance his stereo playing for 100 dollars more. Mary would pay a lawyer up to 100 dollars.