Problem 3:

Awbrey Butte is an exclusive neighbourhood of big, modern houses surrounded by native

pines in the Oregon mountains (see attached article). Resident Susan Taylor likes to use
a clothesline to dry her laundry, and thus saves $80 on average in annual energy costs
(apart from the obvious environmental benefits). Neighbourhood manager Carol Haworth
is concerned that seeing laundry outside might give potential homebuyers the idea that
residents are too poor to afford dryers, and that will drive down property values. Suppose
the decline in property values is proportional to the number of weeks a year Susan dries
her laundry outside.

Number of weeks clothesline Total benefits to Susan Total annualized loss to

is being used Taylor Carol Hayworth

0 $ 0.00 $ 0.00
10 $ 16.00 $ 10.00
20 $ 32.00 $ 25.00
30 $ 48.00 $ 45.00
40 $ 64.00 $ 70.00
50 $ 80.00 $ 100.00

(a) In the absence of bargaining, how many weeks would Susan dry her laundry if she
has a right to do so?

Solution: In absence of bargaining, Susan would like to derive maximum benefit and hence
will use clothesline for 50 weeks.

(b) In the absence of bargaining, how many weeks would Susan dry her laundry if Carol has
a right to protect her property value?

Solution: In absence of bargaining, Carol would like to incur minimum annualized loss and
hence will let Susan to use clothesline for 0 weeks.

(c) What is the socially optimal number of weeks the clothesline should be used?

Solution:
Number of weeks
Total benefits to Total annualized loss to Net Benefit (A-
clothesline is being
Susan Taylor (A) Carol Hayworth (B) B)
used
0 $ 0.00 $ 0.00 $ 0.00
10 $ 16.00 $ 10.00 $ 6.00
20 $ 32.00 $ 25.00 $ 7.00
30 $ 48.00 $ 45.00 $ 3.00
40 $ 64.00 $ 70.00 -$ 6.00
50 $ 80.00 $ 100.00 -$ 20.00
Calculating the Net Benefit which is nothing but difference of Benefits to Susan and Cost to
Carol, we conclude that socially optimal number of weeks is 20 as the net benefit is
maximum.

(d) With bargaining, how many weeks would Susan dry her laundry if she has a right
to do so? What is the minimum Carol would pay Susan?

Solution:
Number of
Total
weeks Total benefits Additional amount
annualized loss Net Expense to Carol
clothesline to Susan paid by Carol to
to Carol (80-A+B)
is being Taylor (A) Susan (80 - A)
Hayworth (B)
used
0 $ 0.00 $ 0.00 $ 80.00 $ 80.00
10 $ 16.00 $ 10.00 $ 64.00 $ 74.00
20 $ 32.00 $ 25.00 $ 48.00 $ 73.00
30 $ 48.00 $ 45.00 $ 32.00 $ 77.00
40 $ 64.00 $ 70.00 $ 16.00 $ 86.00
50 $ 80.00 $ 100.00 $ 0.00 $ 100.00

When Susan has the right to use clotheslining, she would want to derive the maximum benefit
of $80. When they bargain, for any given number of weeks, Carol would have to pay certain
sum to Susan to compensate so that net Susan’s benefits are always $80. For all given
number of weeks, we find out that net expense to Carol is minimum for 20 weeks and there
she ends up paying $48.

(e) With bargaining, how many weeks would Susan dry her laundry if Carol has a right
to protect her property value? What is the minimum Susan would pay Carol?

Solution:
Number of Total Total
weeks benefits to annualized loss Amount paid by Net Benefit to Susan (A-
clothesline is Susan Taylor to Carol Susan to Carol (B) B)
being used (A) Hayworth (B)
0 $ 0.00 $ 0.00 $ 0.00 $ 0.00
10 $ 16.00 $ 10.00 $ 10.00 $ 6.00
20 $ 32.00 $ 25.00 $ 25.00 $ 7.00
30 $ 48.00 $ 45.00 $ 45.00 $ 3.00
40 $ 64.00 $ 70.00 $ 70.00 -$ 6.00
50 $ 80.00 $ 100.00 $ 100.00 -$ 20.00

When Carol has a right to protect her property, she would want to keep her losses to $0.
When bargaining occurs, for any given number of weeks, Susan will have to compensate an
amount equivalent to losses corresponding to those weeks to Carol. Here we see that Susan
derives maximum benefit for 20 weeks where she pays Carol an amount $25.