3. Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?

See the explanation below.

Explanation:

Coase theorem states that it is possible for private parties to solve the problems of externalities with involving a third party it is costless for them to bargain over resource allocation.

Given this description, we can now answer the question as follows:

a.  What determines whether your roommate smokes in the room?

Based on the above, the smoker and non-smoker will bargain over whether it is possible for the smoker to continue smoking in the room based on the value of the choice of each party.

If the value placed on clean air by the nonsomker is greater than the value the smoker placed on smoking, the bargain will result in stopping smoking by the smoker. But if the value placed on smoking by the smoker is greater than the value the nonsmoker placed on clean air, the bargain will result in the smoker continue to smoke in the room.

b. Is this outcome efficient?

This outcome is efficient as the bargaining process is costless or as long as no transaction costs prohibit them from reaching an agreement.

c. How do you and your roommate reach this solution?

It is possible to reach this solution either by the non-smoker paying off the smoker to stop smoking, or the smoker paying off the non-smoking roommate to continue smoking.

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