Page 753 - Microeconomics, Fourth Edition

c17ExternalitiesandPublicGoods.qxd 8/22/10 4:56 AM Page 727

PROBLEMS 727
of whether the property rights are owned by the commu- level of backhoes is Q* 12, find the tax that induces the
nity or the producer. socially efficient level of backhoes in equilibrium and the
b) How would your answer to part (a) change if the extra value of c.
yearly fixed cost of the filter were $600,000?
17.19. The town of Steeleville has three steel factories,
17.15. Two farms are located next to each other. During each of which produces air pollution. There are 10 citi-
storms, sewage from Farm 1 flows into a stream located zens of Steeleville, each of whose marginal benefits from
on Farm 2. Farm 2 relies on this stream as a source of reducing air pollution is represented by the curve p(Q)
drinking water for its livestock, and when the stream is 5 Q/10, where Q is the number of units of pollutants
polluted with sewage, the livestock become sick and die. removed from the air. The reduction of pollution is a
The annual damage to Farm 2 from this form of pollution public good. For each of the three sources of air pollution,
is $100,000 per year. It is possible that Farm 1 can prevent the following table lists the current amount of pollution
the runoff of sewage by installing storm drains. The cost being produced along with the constant marginal cost of
of the storm drains is $200,000. reducing it.
a) Provide an argument that the Coase Theorem holds in
this situation. Units of Pollution MC of Pollution
Source Currently Being Produced Reduction
b) Suppose that the damage to Farm 2 is $500,000 per
year, not $100,000 per year (with the cost of storm drains Factory A 20 $10
remaining fixed at $200,000). Provide an argument that Factory B 40 $20
the Coase Theorem holds in this case. Factory C 60 $30
17.16. Suppose a factory located next to a river dis- a) On a graph, illustrate marginal benefits (“demand”)
charges pollution that causes $2 million worth of environ- and the marginal costs (“supply”) of reducing pollution.
mental damage to the residents downstream. The factory What is the efficient amount of pollution reduction?
could completely eliminate the pollution by treating the Which factories should be the ones to reduce pollution,
water on location at a cost of $1.6 million. Alternatively, and what would the total costs of pollution reduction be?
the residents could construct a water purification plant In a private market, would any units of this public good
just upstream of their town, at a cost of $0.8 million, be provided?
which would not completely eliminate the environmental b) The Steeleville City Council is currently considering
damage to them but reduce it to $0.5 million. Under cur- the following policies for reducing pollution:
rent law, the factory must compensate the town for any
environmental damage the factory causes. Bargaining i. Requiring each factory to reduce pollution by 10 units
between the factory owner and the town is costless. What ii. Requiring each factory to produce only 30 units of
would the Coase Theorem imply about the outcome of pollution
bargaining between the town and the factory owner? iii. Requiring each factory to reduce pollution by one-
fourth
17.17. The demand for energy-efficient appliances Calculate the total costs of pollution reduction associated
is given by P 100/Q, while the inverse supply (and with each policy. Compare the total costs and amount of
marginal private cost) curve is MPC Q. By reducing pollution reduction to the efficient amount you found in
demand on the electricity network, energy-efficient ap- part (a). Do any of these policies create a deadweight
pliances generate an external marginal benefit according loss?
to MEB eQ.
c) Another policy option would create pollution permits,
a) What is the equilibrium amount of energy-efficient to be allocated and, if desired, traded among the firms. If
appliances traded in the private market?
each factory is allocated tradeable permits allowing it to
b) If the socially efficient number of energy-efficient produce 30 units of pollution, which factories, if any,
appliances is Q 20, what is the value of e? would trade them? (Assume zero transactions costs.) If
c) If the government subsidized production of energy- they do trade, at what prices would the permits be
efficient appliances by $S per unit, what level of the traded?
subsidy would induce the socially efficient level of pro- d) How does your answer in part (c) relate to that in
duction? part (a)? Explain how the Coase Theorem factors into
this relationship.
17.18. The demand for air-polluting backhoes in Peoria
is P D 48 Q. The air pollution creates a marginal 17.20. A chemical producer dumps toxic waste into a
external cost according to MEC 2 Q. Supply of river. The waste reduces the population of fish, reducing
S
backhoes is given by P 10 cQ. If the socially efficient profits for the local fishing industry by $100,000 per year.