b. Producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is total surplus per person in the allocation you described in part (a)? 2. Ringo loves playing rock ‘n’ roll music at high volume. Luciano loves opera and hates rock ‘n’ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls. ○ a. What is the externality here? ○ b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome? ○ c. Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome? 3. Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution. ○ a. Using graphs similar to those in Figure 4 , illustrate the effect of this development on the demand for pollution rights. ○ b. What is the effect on the price and quantity of pollution under each regulatory system? Explain. 4. Suppose that the government decides to issue tradable permits for a certain form of pollution. ○ a. Does it matter for economic efficiency whether the government distributes or auctions the permits? Why or why not? ○ b. If the government chooses to distribute the permits, does the allocation of permits among firms matter for efficiency? Explain. 5. There are three industrial firms in Happy Valley. The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.