PS4 - enforced by a damage remedy with damages equal to actual harm caused What proportion of emissions removal will the factory choose and why How

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Legal Studies 145 - Law and Economics I P ROBLEM S ET #4 A factory can produce a fixed output using various technologies, some involving no emission of dust, and others involving substantial emissions. Assume that the marginal cost of removing dust (MC), which is equal to the average cost, is given by: MC = 10 P, where P is the proportion of dust emissions that are removed. As emissions are removed, the marginal benefit of removal falls according to the following relationship: MB = 6 - 2P For those of you who know calculus it might be useful to know that the total cost of removing dust is given by TC = 5P 2 . The total harm caused by emissions is TH = 4(1-P) + (1-P) 2 . Finally, the total benefit (harm avoided) is given by: TB = 6P - P 2 . 1. What is the efficient proportion of emission removal? 2. Assume that the homeowners are given the property right to be free from pollution,
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Unformatted text preview: enforced by a damage remedy, with damages equal to actual harm caused. What proportion of emissions removal will the factory choose, and why? How much will the firm pay in damages? 3. Assume that firms are given the property right to produce using any technology, enforced by a damage remedy, with damages equal to the additional cost of using a technology which removes emissions (i.e., homeowners can require the factory to stop emitting dust, but must pay the additional cost involved). Assuming that there are no transactions costs, what percentage of dust removal will the residents choose? Compare your answer to that given in both 1 and 2. How much will the residents pay to the firm in damages?...
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This homework help was uploaded on 04/16/2008 for the course LEGALST 145 taught by Professor Rubenfield during the Spring '08 term at University of California, Berkeley.

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