08 Jun Question Instructions: Part A and B correspond to t
Question
Instructions:
Part A and B correspond to two different chapters. Choose two questions from Part A and
two from Part B. Please make sure to follow the Homework rubric located in your syllabus
before submitting your assignment.
PART A
1. In which of the following situations is the Coase theorem likely to apply? Explain.
a. The neighbor who lives below you in the apartment building loves to play old John
Denver records at loud volume early in the morning. In fact, his favorite song seems to be
“Thank God I’m a Country Boy.” You hate old John Denver songs and this one in
particular.
b. You have just moved to Beijing and quickly discover that you are allergic to smog. It
causes you great pain in breathing and limits your ability to work. Furthermore, you have
medical expenses related to treatment for its health effects on you.
c. Medical research in the 1990s has revealed a specific cause of birth defects related to a
certain drug prescribed for pregnant women in the 1960s (thalidomide).
d. The water in the huge underground Ogalalla aquifer in the Great Plains region of the
United States is being nitrate contaminated due to agricultural fertilizer use throughout
the region. As a homeowner in this region, you find that your water must be treated in
order to be safe for drinking.
2. One of the most striking aspects of cities in the former Soviet Union is the poor condition of
public places. Streets, parks, libraries, museums, concert halls, and public gathering places of
every description are all in very poor condition, revealing years of neglect and lack of
maintenance. Explain this phenomenon in light of the definition of property rights and the
transition from socialism to a market economy.
3. Suppose that the marginal benefit associated with corn production is MB = 2.5. The marginal
private cost of production is MPC = 2 + 0.1Q, where Q measures bushels of corn produced in
thousands. The marginal damages caused by pollution in corn production are given by MD =
0.05Q.
a. Compute the privately optimal output and the socially optimal output.
b. Compute new solutions for an increase in MB to MB = 3. Explain what has happened
and why.
c. Demonstrate the effects of an increase in MD to MD = 0.075 compared to the solutions
in part a.
4. Policy analysts in the Department of Natural Resources have estimated that the marginal
benefits from water pollution abatement are given by the function MB ¼ 0.90 À 0.03A, where A
is a measure of the abatement intensity. Industry experts have estimated that the marginal cost of
abatement activity is MC = 0.30 + 0.09A.
a. Determine the optimal level of abatement activity.
b. Explain what happens when new technology reduces the marginal cost of abatement to
MC = 0.25 + 0.06A.
5. Consider the pollution reduction mechanism known as emissions trading.
a. What is the economic rationale for permitting emissions trading?
b. If the objective is to minimize the cost of emissions reductions, explain what economic
principle should be followed in allocating emissions reductions between two countries.
c. Suppose the marginal cost curves for emissions reductions in countries A and B are
MCA = 10 + 0.04qA and MCB = 5 + 0.02qB. What is the most efficient allocation of an
emission reduction of q0 between the two countries? (Assume that the emissions
reductions of the two countries must add up to the total emissions reduction: q0 = qA =
qB.)
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