question archive * Unless stated otherwise, assume measures of benefits, costs, and surplus and associated efficiency concepts refer to the monetary non-equity weighted versions
* Unless stated otherwise, assume measures of benefits, costs, and surplus and associated efficiency concepts refer to the monetary non-equity weighted versions
Subject:EconomicsPrice: Bought3
* Unless stated otherwise, assume measures of benefits, costs, and surplus and associated efficiency concepts refer to the monetary non-equity weighted versions.Suppose there is a paper mill which emits sulphur dioxide (SO2) emissions (E) into the atmosphere inflicting damages on a town.
The marginal abatement cost of the paper mill is:MAC(E) = 800-E/6
The marginal damage of the town is:MD(E) = E/3 Units for E are tonnes SO2/y while value units are $/tonne SO2.
f) Suppose instead that the town has the property rights to a healthy environment.Assuming no transaction costs of bargaining, write down functions for the following where the argument is emissions (E).
i) Mill's Maximum MWTP to emit SO2.
ii) Town's Minimum MWTA as compensation for SO2 pollution.
h) Now assume again that the mill has the property rights to pollute with the initial allocation being its business as usual level of emissions.Suppose that the town incurs a marginal bargaining cost of $400 to negotiate each unit of abatement but that (for simplicity), the mill incurs no costs.Find the level of emissions after Coasian exchange and compare to the socially efficient level.Illustrate your answer on a new graph (Fig.2).
i) Assume the town has to collect donations from citizens in order to pay the mill.Use the concept of a public good to explain why it may have difficulty doing so.Use the concepts of non-rivalry, non-excludability, and positive externalities in your answer.
j) Now suppose again that under the initial allocation, the mill has property rights to pollute.If there is perfect liability law, how much abatement will occur?Illustrate on a graph, Fig.3.
k) Continuing on from j), suppose that liability law is imperfect and that there is a 50% chance that the mill will be taken to court and sued.If the mill is taken to caught, there is a 0.3% chance it will be fined for all damages such that the marginal fine is equal to its marginal damages and a 0.7% change it will be let off for free.Illustrate these probabilities in a tree as in the lecture notes.Find the expected marginal fine.If the mill is risk neutral, how much is it expected to emit?If it is a risk taker, will it emit more or less than this?Illustrate your answer on Fig.3.
l) In which final allocation, that in j) or that in k) is the externality said to be completely "internalized".Briefly explain.
