Chapter 18

A number of firms have located in the western portion of a town after single- family residences took up the eastern portion. Each firm produces the same product and in the process emits noxious fumes that adversely affect the residents of the community. a. Why is there an externality created by the firms? b. Do you think that private bargaining can resolve the problem? Explain. c. How might the community determine the efficient level of air quality?

A computer programmer lobbies against copyrighting software, arguing that everyone should benefit from innovative programs written for personal computers and that exposure to a wide variety of computer programs will inspire young programmers to create even more innovative programs. Considering the marginal social benefits possibly gained by this proposal, do you agree with this position?

Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions: Benefits of abating (reduc- \[ \mathrm{MB}=500-20 A \] ing ) emissions: costs of abating emissions: \[ \mathrm{MC}=200+5 A \] where $A$ is the quantity abated in millions of tons and the benefits and costs are given in dollars per ton. a. What is the socially efficient level of emissions abatement? b. What are the marginal benefit and marginal cost of abatement at the socially efficient level of abatement? c. What happens to net social benefits (benefits minus costs) if you abate one million more tons than the efficient level? One million fewer? d. Why is it socially efficient to set marginal benefits equal to marginal costs rather than abating until total benefits equal total costs?

Four firms located at different points on a river dump various quantities of effluent into it. The effluent adversely affects the quality of swimming for homeowners who live downstream. These people can build swimming pools to avoid swimming in the river, and the firms can purchase filters that eliminate harmful chemicals dumped in the river. As a policy adviser for a regional planning organization, how would you compare and contrast the following options for dealing with the harmful effect of the effluent: a. An equal-rate effluent fee on firms located on the river. b. An equal standard per firm on the level of effluent that each can dump. c. A transferable effluent permit system in which the aggregate level of effluent is fixed and all firms receive identical permits.

Medical research has shown the negative health effects of "secondhand" smoke. Recent social trends point to growing intolerance of smoking in public areas. If you are a smoker and you wish to continue smoking despite tougher anti- smoking laws, describe the effect of the following legislative proposals on your behavior. As a result of these programs, do you, the individual smoker, benefit? Does society benefit as a whole? a. A bill is proposed that would lower tar and nicotine levels in all cigarettes. b. A tax is levied on each pack of cigarettes. c. $A$ tax is levied on each pack of cigarettes sold. d. Smokers would be required to carry governmentissued smoking permits at all times.

The market for paper in a particular region in the United States is characterized by the following demand and supply curves: \[ Q_{D}=160,000-2000 P \quad \text { and } \quad Q_{S}=40,000+2000 P \] where $Q_D$ is the quantity demanded in 100 -pound lots, $Q_{\mathrm{S}}$ is the quantity supplied in 100 -pound lots, and $P$ is the price per 100 -pound lot. Currently there is no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost (MEC) associated with the production of paper is given by the curve $\mathrm{MEC}=0.0006Q_S$ a. Calculate the output and price of paper if it is produced under competitive conditions and no attempt is made to monitor or regulate the dumping of effluent. b. Determine the socially efficient price and output of paper. c. Explain why the answers you calculated in parts (a) and (b) differ.

In a market for dry cleaning, the inverse market demand function is given by $P=100-Q$, and the (private) marginal cost of production for the aggregation of all dry-cleaning firms is given by $\mathrm{MC}=10+Q$ Finally, the pollution generated by the dry cleaning process creates external damages given by the marginal external cost curve $\mathrm{MEC}=Q$ a. Calculate the output and price of dry cleaning if it is produced under competitive conditions without regulation. b. Determine the socially efficient price and output of dry cleaning. c. Determine the tax that would result in a competitive market producing the socially efficient output. d. Calculate the output and price of dry cleaning if it is produced under monopolistic conditions without regulation. e. Determine the tax that would result in a monopolistic market producing the socially efficient output. f. Assuming that no attempt is made to monitor or regulate the pollution, which market structure vields higher social welfare? Discuss.

There are three groups in a community. Their demand curves for public television in hours of programming, $T,$ are given respectively by \[ $$\begin{array}{l}{W}_1=\mathrm{\$}200-T\\ W_2=\mathrm{\$}240-2T\\ W_3=\mathrm{\$}320-2T\end{array}$$ \] Suppose public television is a pure public good that can be produced at a constant marginal cost of $\mathrm{\$}200$ per hour a. What is the efficient number of hours of public television? b. How much public television would a competitive private market provide?

Reconsider the common resource problem given in Example $18.7.$ Suppose that crawfish popularity continues to increase, and that the demand curve shifts from $C=0.401-0.0064F$ to $C=0.50-0.0064F$ How does this shift in demand affect the actual crawfish catch, the efficient catch, and the social cost of common access? (Hint: Use the marginal social cost and private cost curves given in the example.)

The Georges Bank, a highly productive fishing area off New England, can be divided into two zones in terms of fish population. Zone 1 has the higher population per square mile but is subject to severe diminishing returns to fishing effort. The daily fish catch (in tons) in Zone 1 is $$F_1=200\left(X_1\right)-2{\left(X_1\right)}^2$$ where $X_1$ is the number of boats fishing there. Zone 2 has fewer fish per mile but is larger, and diminishing returns are less of a problem. Its daily fish catch is \[ F_{2}=100\left(X_{2}\right)-\left(X_{2}\right)^{2} \] where $X_2$ is the number of boats fishing in Zone $2.$ The marginal fish catch MFC in each zone can be represented as \[ $$\begin{array}{l}{\mathrm{MFC}}_1=200-4\left(X_1\right)\\ {\mathrm{MFC}}_2=100-2\left(X_2\right)\end{array}$$ \] There are 100 boats now licensed by the U.S. government to fish in these two zones. The fish are sold at $\mathrm{\$}100$ per ton. Total cost (capital and operating) per boat is constant at $\mathrm{\$}1000$ per day. Answer the following questions about this situation: a. If the boats are allowed to fish where they want, with no government restriction, how many will fish in each zone? What will be the gross value of the catch? b. If the U.S. government can restrict the number and distribution of the boats, how many should be allocated to each zone? What will be the gross value of the catch? Assume the total number of boats remains at 100 c. If additional fishermen want to buy boats and join the fishing fleet, should a government wishing to maximize the net value of the catch grant them licenses? Why or why not?