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