coherent. Using the graph in slide 11 of Lecture 4, answer the following questio
ID: 1139407 • Letter: C
Question
coherent. Using the graph in slide 11 of Lecture 4, answer the following questions. a. If the resort has the right to the river's water quality, what is the minimum that the 1. to increase emissions to the efficient level? Identify the amount using the lettering on the graph below. (1 pt) Amount ODAR If the resort has the right to the river's water quality, what is the most that the resort can extract from the mill in exchange for allowing the mill to pollute to the level Q. Amount b. c. Now suppose that demand for the output from the mill declines. On the graph below, show how this decline would affect emissions. Is the efficient level of emissions higher or lower or the same? (2 pt) DMAC to mill MPD to fishing B resort Q" Q" EmissionsExplanation / Answer
Solution:
a) At Q* amount of emissions, notice that the total pollution damage to the fishing resort is of amount OCAQ*. So, if the Mill is willing to pay at least this much amount to the fishing resort, resort will allow it to create Q* amount of emissions.
Thus here the correct answer is OCAQ* (minimum payment is being asked)
b) If the right is not with the resort, mill will produce emissions amounting to Q**. At this amount of emissions, the mill saves itself the total abatement cost of OCDQ**. Now, that the mill can produce emission only till Q* (with property rights to the resort), it incurs abatement cost of AQ*Q**. The mill still has the advantage (or saving from abatement cost) of ODAQ*. So, in any case, under the assignment of property right to resort, mill will have to bear ODAQ*. So this is the maximum amount mill would be willing to pay to the resort (exceeding this payment, mill will rather prefer to buy the abatement equipment).
Thus, the amount resort can extract most from mill = ODAQ*
c) As the demand for output from mill declines, now there will be lesser production of the output. This in turn will lead to lower amount of emissions (or maximum emissions firm produces, shifting Q** nearer to 0). So, now the lower abatement cost is required to prevent pollution. In graph, MAC will shift inwards (to the left). And at the new intersection of MAC and MPD, cost and optimum emission both will be lower. Intuitively, since there is lower emission now, the mill would prefer to pay less to the resort for being able to pollute at new level of Q*.
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