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Question Three

Brot Incorporated operates a large scale bread factory that borders on a major recreation lake owned by MGM Resorts. The bread factory releases yeast into the lake that creates a negative externality for MGM Resorts. Society in this area is composed of Brot Incorporated and MGM Resorts. The information below shows the costs and benefits to Brot Inc. of producing bread and the external damage done to MGM Resorts. There are no positive externalities from bread production.


a. Suppose that there are extremely high negotiations costs between Brot Incorporated and MGM Resorts and that Brot has the right to pollute. Brot Inc. focuses on maximizing its own net benefit. How many tons of bread do you anticipate will be produced? Explain. (8 points)

b. Determine the socially optimal amount of bread. Explain your answer (8 points).

c. If there were zero negotiations costs and MGM Resorts had the right to stop all pollutions, is it possible that Brot Inc. could end up producing the socially optimal amount of bread? If not, explain why not? If so, explain the process that would lead to the socially optimal amount. Be specific using the information in the tables. (8 points)

d. Say there were high negotiations costs and Brot Inc. had the right to pollute. If you were trying to choose a per-unit tax that would get Brot Inc. to choose the socially optimal production of bread, what would it be and why? Remember that a per-unit tax means that the tax is the same amount at every level of output (6 points). 


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