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You want to have an in-ground pool installed. The value to you of having an in-ground pool is 50000. You find a contractor who will provide and install a pool, and you agree on a price of 35000. The expected cost to the contractor to provide and install this pool is 25000.

1. With the completion of this contract, how much does your utility increase/decrease?
2. With the completion of this contract, how much does the contractor's utility increase/decrease?
3. What is the net social gain/loss from this contract?
4. What would the expectation damages be for this contract?

If there were low transaction costs and there was no penalty for breaching the contract:

5. If the cost of providing and installing the pool increased to 40000, what would happen? Is this outcome efficient?
6. If the cost of providing and installing the pool increased to 60000, what would happen? Is this outcome efficient?

The utility for having an in-ground pool installed increases by $15,000, which is the difference between the value to you ($50,000) and the price you agreed upon with the contractor ($35,000). The contractor's utility also increases by $10,000, which is the difference between the price agreed upon ($35,000) and the expected cost to the contractor ($25,000).

The net social gain/loss from this contract is $25,000. This is calculated by subtracting the expected cost to the contractor ($25,000) from the value to you ($50,000).

The expectation damages for this contract would be $15,000, which is the difference between the value to you ($50,000) and the price agreed upon ($35,000).

If the cost of providing and installing the pool increased to $40,000 and there were no penalty for breaching the contract, you might choose to cancel the contract. This is because the price agreed upon ($35,000) is lower than the increased cost of providing and installing the pool ($40,000).

The outcome is efficient when the cost of providing and installing the pool is lower than or equal to the price agreed upon.

If the cost increased to $60,000, the outcome would not be efficient as the price agreed upon ($35,000) is significantly lower than the increased cost of providing and installing the pool ($60,000).

In this case, it may not be financially viable for both parties to proceed with the contract.

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