Econ/Game theory question

by Psychohistorian 1 min read11th May 201157 comments

12


This puzzled me. I'm pretty sure it's one of those unsolvable questions, but I'd want to know if it's not.

Two members of the species Homo Economus, A and B, live next to each other. A wants to buy an easement (a right to cross B's property, without which he cannot bring anything onto his lot) from B so that he can develop his property. B, under the law, has an absolute right to exclude A, meaning that nothing happens unless B agrees to it. The cost to B of granting this easement is $10 - it's over a fairly remote part of his land and he's not using it for anything else. A values the easement at $500,000, because he's got a sweet spot to build his dream house, if only he could construction equipment and whatnot to it. A and B know each others costs and values. They are "rational" and purely self-interested and bargaining costs zero. What's the outcome? I'm guessing it's "Between $5 and $500k," or "There is no deal unless one can credibly commit to being irrational." But I'm really not sure.

This could be asked as "In a bilateral monopoly situation where the seller's reservation price is $5 and the buyer's is $500,000, what is the predicted outcome?" But I figured the concrete example might make it more concrete. 

Now that I've written this, I'm tempted to develop a "True price fallacy" and its implications for utilitarian measurement. But that's a separate matter entirely.