Sarah makes giant wind chime sculptures for a living. When she makes 4 sculptures, she earns $10,000. When the makes 5 sculptures, she earns $12,500. Next door, Gilbert runs a meditation clinic

Question

When Sarah makes 4 giant wind chime sculptures, the noise from the sculptures does not disrupt his patients, and he earns $7,500. When Sarah makes 5 sculptures, the noise is disruptive and Gilbert's profits fall to $6,000. The city has an ordinance which prohibits noise that disrupts the community. a. If you were the benevolent social planner, would you like to see Sarah make 4 sculptures or 5? Why? b. If bargaining between Sarah and Gilbert is easy, how many sculptures will Sarah make? Describe the bargain that results, if any, including the amount of money that changes hands. c. Is the outcome in part b an outcome that the benevolent social planner would endorse? Why or why not?

Answer 1

a. When Sarah makes 5 sculptures, the economic pie is $18,500 (her $12,500 and Gilbert's $6,000). When she makes 4 sculptures, the economic pie is $17,500 (her $10,000 and Gilbert's $7,500). The benevolent social planner would prefer that Sarah makes 5 sculptures.
b. Sarah will make 5 sculptures. She will have to compensate Gilbert for his losses, but since he loses only $1,500 when she makes 5 sculptures and she gains $2,500, there is a scope for a bargain at any price between $1,500 and $2,500.
c. The benevolent social planner would endorse this bargain because it prevents the law from reducing the economic pie.