25. Suppose that there is a large farm and a large recreation firm located on a river. The farm is upstream of the recreational area. The farm uses the streamflow for irrigation. Let S be the amount of streamflow used by the farm and suppose its marginal benefit for irrigation is given by MB-5000-15S. Use of streamflow by the farm is costly to the recreational firm, though, because of lost opportunities for boating, fishing, and camping. Suppose this marginal cost is given by MC=Ss. (a) Draw a sketch of the MB and MC curves for use of S by the farm. On your graph, show the efficient level of S by the farm. Solve for this amount from the equations. (b) If unregulated, the farm uses streamflow at a price of zero. Show on your graph what S this corresponds to. Solve for it from the equations. (c) If the government sets a tax price on streamflow, what tax price per unit of S will result in the farm using the efficient level of streamflow? Show on your graph and find with the equations. (d) If the farm had to purchase use of the streamflow from the recreational firm, what price and quantity would result?
25. Suppose that there is a large farm and a large recreation firm located on a river. The farm is upstream of the recreational area. The farm uses the streamflow for irrigation. Let S be the amount of streamflow used by the farm and suppose its marginal benefit for irrigation is given by MB-5000-15S. Use of streamflow by the farm is costly to the recreational firm, though, because of lost opportunities for boating, fishing, and camping. Suppose this marginal cost is given by MC=Ss. (a) Draw a sketch of the MB and MC curves for use of S by the farm. On your graph, show the efficient level of S by the farm. Solve for this amount from the equations. (b) If unregulated, the farm uses streamflow at a price of zero. Show on your graph what S this corresponds to. Solve for it from the equations. (c) If the government sets a tax price on streamflow, what tax price per unit of S will result in the farm using the efficient level of streamflow? Show on your graph and find with the equations. (d) If the farm had to purchase use of the streamflow from the recreational firm, what price and quantity would result?
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter12: Environmental Protection And Negative Externalities
Section: Chapter Questions
Problem 10SCQ: Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table 12.8 shows the...
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