Smokers impose negative externalities on non-smokers. Suppose the airspace in a restaurant is a resource owned by the restaurant owner. i. How would the owner respond to the negative externality caused by smokers? ii. Suppose smokers own the airspace. How would that change matters? iii. If the government gives ownership of the air to non-smokers, would that change matters?

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.