Question

2.The uble provt ๓ information about costs and benefits that anse omthe est cideproo action hatp Marginal Cost utesi ikeusedt atam er- Output of pesticide (toas per week) farginal extemal costMarginal social benefit dollar per loe) 1S 30 50 67 100 105 s5 140 40 1) If no one owns the lake and if there is no regulation of pollution, what is the quantity of pesticide prodeced and what is the marginal cost of pollution bome by the farmer? (4 marks) 2) If the famer owns the lake, how mach pesticide is produced and what does the pesticide producer pay the fanwer per tone (3 marks)

Answer 1

Solution:

1) When property rights are not determined, in that case producers will only take into consideration Marginal Private Costs . In such a scenario MC = MSB. At this point 5 tons of pesticides are produced with MSB and MC of 75

2) When the farmer is given property to the lake, then will take into consideration the external costs. In such a scenario, output occurs when MSC = MSB where MSC = MC + Marginal External Costs. At 3 tons of pesticides per week, MSB equals130 where MSC = 30 + 100= 130. Because the trout farmer owns the lake, thus the producer of pesticide should pay $100 dollars (MEC).