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Unformatted text preview: 3. Adam and Brett are the only residents of a small island. Adam operates a papermill, and has costs given by MPC = 10+2Q. Adam gets a price of 24 for each unit of paper he sells. Brett hates the pollution that the mill produces, and has damages given by MEC = Q + 2. (a) Assume that property rights to the environment are established, and Adam has them. Further, assume that Adam and Brett can engage in costless bargaining. What will Adams production level Q* be in equilibrium? (b) Continue from part (a). What is the minimum amount Brett would have to pay for Adam to produce at Q*? What is the maximum amount Brett would be willing to pay for Adam to produce at Q*? (c) If Brett had the property rights, what is the minimum payment Adam would have to make to produce at Q*? What is the most he would be willing to pay?...
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- Spring '06
- J Liu