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ECO356%20Homework%206%20Solutions

ECO356%20Homework%206%20Solutions - ECO356 Homework 6...

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ECO356 Homework 6: Name __________________________ Due May 12, 2009 (No late homework) A factory pollutes a lake which is also used by twenty vacation resorts. It would cost the factory $1,000,000 a year to prevent the pollution. Each resort faces the following alternatives (remember that there are twenty resorts): a. Operate as a resort on an unpolluted lake, making $100,000/year profit. b. Operate as a resort on a polluted lake, making $40,000/year profit. c. Operate as a hunting lodge, making $60,000/year profit, whether or not the lake is polluted 1. What is the efficient solution? A. The factory should (pollute/not pollute) B. The resorts should be operated as (resorts/hunting lodges) Resort no pollution = 2,000,000-1,000000 = 1,000,000. Lodge no pollution = 1,200,000 1,000,000 = 200,000. Resort w pollution = 2,000,000 1,000,000 = 1,000,000. *Lodge w pollution 1,200,000 The cost of converting resorts to lodges is less than the cost of controlling emissions, so that is the efficient outcome. In answering 2-5, describe first what happens if there is no bargaining between factory and resort owners, and then whether bargaining will change the outcome. Explain briefly.
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