Question

Your neighbor never mows his lawn. You don’t have any legal right to force him to mow, but the mess in his front yard is making your neighborhood unsightly and reducing the value of your house. The reduction in the value of your house is $5,000, and the value of his time to mow the lawn once a week is $1,000. Suppose you offer him a deal in which you pay him $3,000 to mow. How does this deal affect surplus?

Answer 1

Answer: The deal will have the effect of increasing both your surplus as well as your neighbor's

Explanation:

Assuming your neighbor accepts the deal, you would have paid $3,000 when in fact your house value had reduced by $5,000. This give you a surplus of $2,000 because you paid $2,000 less than the cost to you if your neighbor did not mow the lawn.

Your neighbor also makes a surplus because where normally it would cost them $1,000 to mow the lawn, they got $3,000. They also make a surplus of $2,000 over the cost to mow.