Question

1) A Chemical factory is located next to a farm. This plant produces several types of adhesives. Airborne emissions from the production of chemical factory damage crops on the farm. The private marginal benefits of producing adhesives (P = 360 – 0.4Q), the private marginal costs (P = 90+ 0.29), and the external damage (P = 0.30)is as follows: 200 300 400 500 600 700 800 900 Tons of 100 adhesives PMB 320 PMC 1 10 EMC 140 0 280 130 1 90 240 150 240 200 170 290 160 190 340 120 210 390 80 230 440 40 250 490 270 540 a) Suppose that there are no laws preventing the chemical factory from emitting pollution. How many tons of adhesives will it produce? Briefly explain why. b) From an economic point of view, what is the socially optimal level of adhesive production? Briefly explain why, using a graph to support your answer. c) Assuming that there are no laws preventing the factory from polluting and the property rights belong to the factory, describe how the socially efficient outcome could be achieved using the Coase Theorem. d) Now assume these rights belong to the farm and still there are no laws preventing the factory from polluting, describe how the socially efficient outcome could be achieved using the Coase Theorem. e) While the Coase Theorem solutions in (c) and (d) is economically efficient, do you think it is equitable? Briefly explain why or why not.

Answer 1

& Tons PMB 100 320 700 80 800 YO 900 O 200 300 400 500 600 280 240 200 160 120 130 150 so 170 170 190 190 210 ain 190 240 290 340 390 PHC 110 230 250 270 EMC 140 440 490 540 a) No laws au there, bence factory will emit until its PMB is equal to zelo le 900 tons. It will do so to acheine all the benefits till marginal benefit from adding more tons is zew b) from the economic point of view PME should be equal to EMC that point is termed as soually efficent As shown in the kigue PMB sloped downwold and EMC slopes upwards. They point of ut tersection is I poually optimum point . ON

PMB &MC B o MC 320 pourt e is the equiubnum cud 300 unts is the Doually oppomum ouhome 240 - bent PMB 0 100 300 Cooo Tons of adhesive c) Property rights belong to the factory , so pr o uduro 900 tons. when factory produces 900 bons, Pore & factay is a COAC) and y formees are willing to pay allobc) By reducing polluhon chill 300 units actory benyit lass is (ECD) but gain by faimus in I ai ( EB CD). Hence factory will gain only uphil point & d) when when heo peetu peo perty nghts belong to the rights belong to t faem o tons & Adhesive is produced. Fachouy can free some amount to factory oem to alloro them to produce To produce 900 tons Jaum wants I ae(OBc) but they can offer as (Abo bargain will happen til point & where factor is willing to gue di/OAED) and they liquis only OED. e) Yes it is equitable if there au no bargain cost of bargaining becomes costly it will coll longer be al equitable equilibrium.