Question 1
Use the graph below, in conjunction with the Coase Theorem, to answer the following questions. Suppose a coal plant and a hotel are located on a river. The hotel is downstream of the coal plant, so any pollution from the plant directly affects the profits of the hotel. The graph below shows the marginal pollution damages (MPD) for the hotel and the marginal pollution control costs (MPCC) for the coal plant. Suppose the coal plant holds the property right.
1) How much will the hotel pay the plant per unit to clean up its pollution to Q*?
The hotel will pay P=[x]
Question 2
Why does the hotel pay the coal plant x amount (where 'x' is your response from the previous question) per unit?
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a.
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Because x
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b.
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Because x>MPD.
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c.
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Because there is no efficient level of pollution.
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d.
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Because x=MPCC.
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Question 3
1) What is the hotel's net gain by paying the plant to clean up pollution? Use the letters in the graph to determine the area of net gain to the hotel. (Example Area = A or Area = A+B)
Area = [x]
Question 4
Why would the plant accept payment = x/per unit to clean up pollution to level Q*?
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a.
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Because x
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b.
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Because x>MPD.
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c.
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Because there is no efficient level of pollution.
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d.
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Because x>MPCC.
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Question 5
1) What total payment does the plant receive for this clean up? Use the letters in the graph to determine the total payment (Example: Area = A or Area = A+B).
Area = [x]