ECON 0265 Week 6 meeting prompt
Professor Rao
Negotiating over a local externality
This week, we’re going to play a small game to think about externalities and bargaining. You will be placed into pairs. One member of your pair will be a barbecuer and the other will be the neighbor. The barbecuer wants a nice smoky barbecue, while the neighbor doesn’t like to breathe in the barbecue smoke. For convenience, the person whose first name is alphabetically first will be the barbecuer, and the other person will be the neighbor. (If you have three people in your group, the person whose first name is alphabetically third will be a barbecuer if they’re a feb, a neighbor if they’re a reg.)
We’ll simplify the problem by assuming smoke can be produced in 4 discrete levels (0-3). Your values from different levels of smoke production are shown below.
Once you’ve determined who is the barbecuer and who is the neighbor, you’ll determine the initial allocation of rights.
- If your breakout room has an even number: The neighbor has the right to smoke-free air. Your room starts at a smoke level of 0, and the neighbor must be compensated for any increase.
- If your breakout room has an odd number: The barbecuer has the right to a smoky barbecue. Your room starts at a smoke level of 3, and the barbecuer must be compensated for any decrease.
You may offer payments to each other, but they must be less than or equal to the value you derive from the smoke level. For example, if you were considering settling on a smoke level of 0, the neighbor can offer a payment of up to $35 while the barbecuer can offer no payment. Similarly, if you were considering settling on a smoke level of 3, the barbecuer could offer a payment of up to $60 while the neighbor can offer no payment.
When you’ve reached an agreement
When you’ve reached an agreement, one of you will send Prof Rao a Slack DM with the following information:
- your breakout room number;
- the agreed-upon smoke level;
- the details of any agreed-upon payments.
When you’re finished (or the time is up), you may return to the main room.