Answer both questions. There is an overall word limit of 2000 words, submissions exceeding this limit will be penalised (submissions that go over this limit by +20% will be penalised at a rate of 5% of the total mark per 200 words over the limit), but note that text in diagram captions, labels on diagrams, etc. do not count in this word limit.
A chemical plant is on a river situated upstream from a fish farm. Pollution from the chemical plant causes damage to the fish farm in terms of reduced output of fish. In Figure 1 below the line MNPB represents the chemical plant’s marginal benefit from polluting the river and the line MEC represents the marginal external costs that this pollution imposes on the fish farm. State your answers to questions (i) to (iv) in terms of the areas A, B, C, D, E and F.
ECON329 Assignment 1 Coase image
If the fish farm has the property rights to the river, what area represents the minimum total
payment the fish farm would be willing to accept to allow the chemical plan to pollute the river to the efficient level? (15% marks)
(ii) If the fish farm has the property rights to the river, what area represents the fish farm’s gain from trading water rights with the chemical plant at the fair bargaining price? (15% marks)
(iii) If the chemical plant has the property right to pollute the river, what area represents the minimum total payment the plant would be willing to accept to reduce water pollution to the efficient level? (15% marks)
(iv) If the chemical plant has the property right to pollute the river, what area represents the fish farm’s gain from trading water rights with the plant at the fair bargaining price? (15% marks)
(v) If the scenario is altered so that the pollution from the chemical plant is imposing external costs upon several different towns situated downstream (in terms of the clean-up costs incurred in cleaning the river water to supply drinking water) rather than just the fish farm do you think that is likely to change the likelihood of a successful Coasian bargaining solution being achieved? Explain the reasoning for your answer. (40% marks)
During the winter Armidale suffers from atmospheric pollution caused by smoke from domestic heating. Armidale Dumaresq Council is considering introducing a policy tool in order to reduce levels of smoke pollution. They are evaluating two policy tools which both involve the monitoring and measurement of smoke particulates from each chimney within the Council’s jurisdiction (imagine that this could be done reasonably cheaply):
a tax on smoke emissions: householders will be charged per kilogram of smoke particulates emitted
a standard which limits the concentration of particulates emitted by each household over each 24 hour period. Any householders emitting more than the standard will be fined for each breach.
(i) Compare and contrast these two policy measures (particularly with respect to the economic efficiency of each). (70% marks)
(ii) Explain which of these you think would be most effective in reducing smoke emissions. (30% marks)