 Homework #1 Due Thursday  Group Quiz Next Thursday  Writing Assignment Due Oct. 28th

Price of Good Quantity of Good Marginal Private Cost Demand Q2 Marginal Social Cost Q1 P* A’ B’ C’ D’ C

 The Pursuit of Efficiency Legislative and Executive Regulation  Direct Control – Quota  Cap and Trade  Pigovian Tax – “polluter pays principle”  Not always clear who pays

Price of Good Quantity of Good Supply Demand Q1 Supply with Tax Q2 Pd2 P1 Ps2

Price of Good Quantity of Good Marginal Private Cost Demand Q2 Marginal Social Cost Q1 P* P Ps2

Pigovian Tax Problem Suppose the demand function for gasoline is P d = Q where Q represents billions of gallons of gasoline. Suppose the supply function for gasoline is based on the firms’ marginal private costs and equals P s =Q What is the market equilibrium level of output and price?

Pigovian Tax Problem Suppose the government’s EPA determines the socially optimal amount of gasoline use is actually 3 billion gallons of gasoline. To reach this socially optimal quantity, the government is going to implement a per unit tax on the consumption of gasoline. The tax revenue from which will go to protecting the environment as determined by the EPA. What should the tax amount be? What price will the consumers pay? What price will the sellers receive? How much money will go to protecting the environment?

 If property rights are well- defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities.

.Two pieces of land that are adjacent. Farmer McDonald grows crops worth $6,000. Farmer Brown’s land is on a swamp. Farmer Brown drains the swamp and can grow crops on his land worth $2,000. As a result McDonald’s land flood and destroys his crop.

Coase Theorem Problem A chemical factory is situated next to a farm. Airborne emissions from the chemical factory damage crops on the farm. The marginal benefits of emissions to the factory and the marginal costs of damage to the farmer are as follows MB= 360 – 0.4 Q and MC=90+0.2Q From an economic viewpoint, what is the best solution to this environmental conflict of interest? How might this solution be achieved?

 Group Quiz Next Thursday  Writing Assignment Due Oct. 28th