Andy owns a valuable postage stamp he values at 1,000 dollars. Betty wants to add this stamp to her collection and is willing to pay 1,200 dollars for it. By email, Andy and Betty reach an agreement that Andy will sell Betty this rare stamp for 1,100 dollars. Christine contacts Andy and offers to pay 1.500 to Andy for the stamp because Christine values this stamp at 1,800 dollars. (a) What surplus amount was generated by the original email contract? Why is this amount suboptimal? (b) Andy contacts Betty by email and advises her that he wants a higher price from her because Christine has offered 1,500 dollars for the stamp. Instead of renegotiation, Betty tells Andy that she will be seeking specific performance, a court order that Andy perform the original 1,100 dollar contract. How will specific performance affect the allocation and redistribution of surplus among Andy, Betty and Christine? If transaction costs = 0, would there be a renegotiated contract and what would the new contract be
Please answer parts c, d and e only
Andy owns a valuable postage stamp he values at 1,000 dollars. Betty wants to add this stamp to her
collection and is willing to pay 1,200 dollars for it. By email, Andy and Betty reach an agreement that
Andy will sell Betty this rare stamp for 1,100 dollars. Christine contacts Andy and offers to pay 1.500
to Andy for the stamp because Christine values this stamp at 1,800 dollars.
(a) What surplus amount was generated by the original email contract? Why is this amount suboptimal?
(b) Andy contacts Betty by email and advises her that he wants a higher price from her because
Christine has offered 1,500 dollars for the stamp. Instead of renegotiation, Betty tells Andy that she
will be seeking specific performance, a court order that Andy perform the original 1,100 dollar contract.
How will specific performance affect the allocation and redistribution of surplus among Andy, Betty
and Christine? If transaction costs = 0, would there be a renegotiated contract and what
would the new contract be?
(c) If Betty tells Andy she will be seeking expectation damages instead of specific performance, how will expectation damages affect the allocation and redistribution of surplus among Andy, Betty and Christine? If transaction costs = 0, would there be a renegotiated contract and what would the new
contract be?
(d) How high would transaction costs be to prevent bargaining? If there is no bargaining due to the
transaction costs being too high, which remedy, specific performance or expectation damages, is more
efficient?
(e) If transaction costs = 0, but the variant version of the Theorem of Coase applies instead of the
invariant version of the Theorem of Coase, how are the economic outcomes you identified in parts (b)
and (c) affected?
Please answer parts c, d and e only
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