Consider the market for cement production. Suppose that cement production emits a cloud that causes breathing problems for people that live in the neighborhood, thus creating health problems for by-standers. With that in mind, answer the following questions.
a) Do the cement industry have a negative or a positive externality? Is it an externality in production or in consumption?
b) Describe how the externality affects the private market for cement. Make sure your discussion uses p*& q* to indicate the private market equilibrium price and quantity, and a pE & qE to indicate the socially optimal price and quantity.
c) Given this externality, list the three things that the government can do to get the private market closer to the socially optimal outcome.
d) Which of the three things you listed in part c is the best way for the government to increase society's welfare? Explain why.
e) Describe Coase Bargaining by defining the Coase Theorem.
f) Now suppose that the benefit of cement production for the firm is B = $100,000 and the cost to the local community in health related expenses is $95,000. Should the cement be produced? Explain.
g) If the Coase Theorem were applied to this situation, what would be the outcome? Describe how this outcome could be achieved.
h) List the three things that will prevent Coase Bargaining from working.