13.2 Consider a river with a paper mill and a commercial salmon fishery. The fishery canoperate at one of two locations: upstream (above the mill) or downstream (in the pollutedpart of the river). Pollution lowers profits for the fishery: without pollution, profits are $300upstream and $500 downstream; with pollution, profits are $200 upstream and $100 down-stream. The mill earns $500 in profit, and the technology exists for it to build a treatmentplant at the site that completely eliminates the pollution, but at a cost of $200. There aretwo possible assignments of property rights: (i) the fishery has the right to a clean river and(ii) the mill has the right to pollute the river.a. What is the efficient outcome?b. What are the outcomes under the two different property regimes if bargaining is not anoption? Is the optimal outcome achieved?c. What are the outcomes under the two different property regimes if the firms can bargaincostlessly? Is the optimal outcome achieved?d. How do the above answers change if the technology instead cost $350?

What is the efficient outcome?The efficient outcome occurs at the point when the total…

Answered: 13.2 Consider a river with a paper mill…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 5PA

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How can high-income countries benefit from covering much of the cost of reducing pollution created by low-income countries?
Is zero pollution possible under a marketable permits system? Why or why not?
(External Costs with Variable Technology) Think of an industry that pollutes the water and has access to variable technology for reducing that pollution. Graphically illustrate and explain the impact of each of the following, other things constant, on the optimal level of water quality: a. New evidence is discovered about a greater risk of cancer from water pollution. b. The cost of pollution-control equipment increases. c. A technological improvement reduces the cost of pollution control.
Economists sometimes shock noneconomists by stating that they do not favor the complete elimination of pollution. Explain the rationale for this position.
Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?
A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwoods forest and grow com, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between T and R, decide which one is better. Why? In the choice between T and S, can you say which one is better, and why? If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?
What is a pollution charge and what incentive does it provide for a firm to take external costs into account?
In the Land of Purity, there is only one form of pollution, called gunk. Table 12.14 shows possible combinations of economic output and reduction of gunk, depending on what kinds of environmental regulations you choose. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the percentage reduction of gunk, and with the quantity of economic output on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between K and L, can you say which one is better and why? In the choice between K. and N, can you say which one is better, and why? If you had to guess, which choice would you think is move likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice L or M? Why?
As the extent of environmental protection expands, would you expect the marginal benefits of environmental protection to rise or fall? Why or why not?
Refer to Table 12.2. The externality created by the refrigerator production was 100. However, once we accounted for both the private and additional external costs, the market price increased by only 50. If the external costs were 100 why did the price only increase by 50 when we accounted for all costs?
What is a marketable permit and what incentive does it provide for a firm to account for external costs?
Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Fe and Qe. On the graph, shade in the deadweight loss at the market output.

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