Assume a water market, and let MB denote the marginal benefit from spraying fertilizers while MC denotes the marginal cost. That is, MB = 10 - q, and MC = 3/2 q where q denotes total pollution generated. The state government would like to define the rights to the underground water and set an institution that will lead to pollution regulation. 1. Use a figure to depict the competitive outcome. Derive the competitive equilibrium outcome. What is the net benefit, net cost, and the equilibrium amount of pollution generated, i.e., q? 2. Use a second figure to explain how well-defined property rights can create a market for the pollution and internalize fertilizer's social cost. Separate the analysis to two different institutions and assume surpluses are distributed evenly between the polluter and pollutee: 1. The cotton producer, who is also the polluter, has the right to pollute and the ownership of the underground water. 2. Assume the dairy farmer, who is the pollutee, has the right to clean water.
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Assume a water market, and let MB denote the marginal benefit from spraying fertilizers while
MC denotes the marginal cost. That is, MB = 10 - q, and MC = 3/2 q where q denotes total
pollution generated.
The state government would like to define the rights to the underground water and set an
institution that will lead to pollution regulation.
1. Use a figure to depict the competitive outcome. Derive the competitive equilibrium
outcome. What is the net benefit, net cost, and the equilibrium amount of pollution
generated, i.e., q?
2. Use a second figure to explain how well-defined property rights can create a market for
the pollution and internalize fertilizer's
institutions and assume surpluses are distributed evenly between the polluter and
pollutee:
1. The cotton producer, who is also the polluter, has the right to pollute and the
ownership of the underground water.
2. Assume the dairy farmer, who is the pollutee, has the right to clean water.
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