Answer
Paying compensation is worse for Janis than paying the tax.
Work Step by Step
Compensating dormmates per song
External cost per song = \$4
Songs played if no tax = \$9
Total compensation required = 9 × 4 = \$36
Compare with tax:
Tax per song = \$4
With tax, she plays 6 songs → total tax paid = 6 × 4 = \$24
Comparison from Janis’s perspective:
Compensating dormmates costs \$36 and allows her to play 9 songs → CS calculation:
WTP = 45
Compensation paid = 36
Net CS = 45 − 36 = 9
Paying tax:
She plays 6 songs, CS = 15
Tax paid = 24 (we already included price in previous calculation?) Actually, in part (b), the CS already accounts for price/tax: CS = 15
Comparison:
Paying tax → CS = 15
Compensating dormmates → CS = 9
Conclusion: Paying compensation is worse for Janis than paying the tax.
