ECP 3302 – A factory that emits chemical runoff

Subject: General Questions / General General Questions
Question

1) A factory that emits chemical runoff and Shephard’s fishing club share a lake. Chemical runoff from the factory creates water pollution that harms the salmon. The private marginal cost, marginal social cost, and marginal social benefit from producing these chemicals are in Figure 1. Assume polluting is legal and no one owns the lake into which waste is dumped, then the amount of chemicals produced each week will be (in tons)

A) 0

B) 4

C) 8

D) None of the above.

2) Refer to Figure 1. Now assume the chemicals dumped into the lake have always harmed the salmon, but now they also begin to damage the fishing boats. Because of this, the

A) MSC curve shifts to the left

B) MSC curve shifts to the right

C) MB curve shifts to the left

D) MB curve shifts to the right

3) In Figure 1, the efficient level of chemicals produced per week is (in tons)

A) 0

B) 4

C) between 5 and 7

D) 8

4) Refer to Figure 1. Initially the lake is owned by no one. Keeping in mind Coase’s theorem, if transactions costs are low then if the chemical factory owns the lake ________ tons of chemicals will be produced and if the fishing club owns the lake, ________ tons of chemicals will be produced.

A) 4; 4

B) 4; 8

C) 8; 4

D) 8; 8

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