Question

2. (15 points) In the episode, The One with the Tea Leaves, Chandler moves in with Monica, Monica finds out Chandler has two identical copies of the 1982 hit Broadway musical, Annie. Chandler loves humming songs from the musical every chance he gets, his favorite being, Impossible. It irritates Monica because Annie is her least favorite musical. She's likes Cats better. (a) Represent this situation using a graph. Show efficient consumption of Annie music and situation when Chandler hums as many musical songs as he wants. (b) Suppose that there are no legal restrictions on singing Broadway. musical songs Chandler has a right to sing Broadway songs as loud as he wants and as much as he wants. Monica approaches Chandler with an offer to pay money for reducing the number of hours of the singing. Will negotiations achieve efficient outcome? Explain. (c) Suppose Monica has a right to quiet environment. This means that singing Broadway music is legal, but Monica has a right to prohibit Chandler from singing these songs loudly any time. Suppose Chandler approaches Monica with an offer to compensate Monica for each hour of singing. Will negotiations reach efficient outcome? Explain. and

Answer 1

Answer a :-

The above situation can be analysed from the given graph where Monica does not like that Chandler sings the song from the album Annie as this music irritates her . However chandler loves to hum this song due to which the private marginal cost of singing the song for chandler is less than the social marginal cost of listening the song that irritates Monica . This is a .example of negative externality of production. In the above graph the private marginal cost curve of Chandler and marginal benefit curve of Humming this song intersects each other at point A where quantity of music that Chandler want to listen is Qm. However listening to the song irritates Monica which has increased her cost of listening to the music due to which the higher curve of social marginal cost intersects the marginal benefit curve at point B where Monica want to listen less of this song leading to a lower quantity of QSo in comparison to chandler optimal quantity of qm. The shaded triangle represents the dead weight loss to the society.

Answer b :-

If chandler has the right to hum songs then the starting point of negotiation is zero level of abatement . If Monica wants the abatement to be QSo quantity . So to reach this level of equilibrium quantity chandler has to incur cost of abatement which will increase its private marginal cost curve up to the social marginal cost curve automatically leading to production of socially desirable level of output of songs . It must be noted that Chandler will incur cost of abatement as he is compensated by Monica for doing so .

Answer c :-

If Chandler compensates Monica for each hour of music that she has to listen then the social marginal cost curve of Monica will automatically fall to private marginal cost curve of chandler thereby forming a new equilibrium level at point A which will lead to the production of higher quantity of qm.