A physician and a confectioner are located in adjacent storefront offices. As part of his process for making candy, the confectioner uses a large blender that is very noisy and prevents the physician from effectively consulting with patients. (The blender is so loud that the physician cannot hear through her stethoscope when the blender is being used.) So, in the current situation, the physician's value of production is 0, and the confectioner's value of production is 400. If the confectioner does not operate, he earns 0 but the physician earns 2000.
(a) Suppose that the confectioner has the legal right to operate his blender but that the parties are free to contract and have good external enforcement. Use the standard bargaining solution to predict the outcome under the assumption that the parties have equal bargaining weights.
(b) Suppose that it is illegal for the confectioner to operate his blender without permission from the physician, but, again, the parties can freely contract and have good external enforcement. What would the outcome be in this case? Assume equal bargaining weights as before.
(c) Suppose that the legal default is that the physician has the right to recover damages of z if the confectioner uses his blender. Determine what would happen if the parties do not contract, and note how this depends on z. Finally, describe the final payoffs, and whether the parties contract, as a function of z. Apply the standard bargaining solution with equal bargaining weights.