Assignment

A chemical factory is situated next to a farm. Airborne emissions from the chemical factory damaged the crops on the farm. The marginal benefits of emissions to the factory and the marginal cost of the damage to the farmer are as follows: Quantity of Emissions (tons) 0 100 200 300 400 500 600 700 800 900 Marginal Benefits to Factory (in thousand dollars) 360 320 280 240 200 160 120 80 40 0 Marginal Cost to Farmer (in thousand dollars) 90 110 130 150 170 190 210 230 250 270

a) Using the marginal benefits and costs schedule above, plot a graph that shows the interaction between benefits to the factory and the cost to farmer.

b) From an economic point of view, at what quantity and price of emissions does the benefits to factory balance the cost to farmer? (Hint: Best solution will be where benefits to the factory balances cost; MB=MC quantity & price)

c) In arriving at an efficient solution to this environmental conflict of interest, what economic principle is exhibited here? State the two limitations of this principle.

d) Assume we assign the property rights to the farmer; show algebraically how this best solution quantity in part (a) might be achieved through negotiations between the farmer and the factory based on coarse theorem. (Compute and explain the gains/losses to each party in the negotiation as well as the total social gains/losses). (Hint: Using the graph you have drawn from part (a): Assign property rights to the farmer and compute, gains and losses to each party as well as net social benefits. Refer to pages 48- 50 of your textbook)

e) Answer True or False to the following statement and explain. The best solution or efficiency point to the environmental conflict above will change depending on who is assigned the property rights. (True or False?)