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RockíníRoll Ainít Noise Pollution!
In a dormitory two students are are sharing one room. Student A likes to read French lyric.

Student E loves the Rolling Stones. The students have the following utility functions:

mA =  (xA )1/2+ (M - m )1/2

UE = (xE)1/2 + (m)1/2

 

  with:

xi -- consumer spending of the person (A,E)  i?

m -- volume of the music (Rolling Stones)

M -- greatest possible volume

 

Each person has an income of  I
= 2

1. Why is a prohibition of stereos not efficient?

2. What is a Pareto efficient volume?

3. If student E owns a tradable permit for playing music, what would the according market equilibrium look like?

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