ECON 3680
Homework 3 Answers
1. Coase vs. Pigou:
a. Coase takes Pigou to task for not seeing the bigger picture. “If there is a problem, the
state must step in to fix it,” is how Coase reads Pigou. Rather, Coase sees the current
state of affairs (current as of the writing of Pigou) as being as much an issue of the
choices the state has already made as it is a problem of market inefficiency. By taking a
step back from the specific problems Coase sees the possibilities of a multitude of
responses compared to Pigou’s singular response of “tax the problem.”
b. Coase takes great pains to make clear that the issue is not whether or not the state
intervenes. Any rule whether it is a tax, an assignment of liability, or an assignment of
ownership is a form of intervention. Rather, he implores the reader to consider the
relative merits of different types of intervention.
2. Methods of Evaluation
a. Cost of Lead Poisoning: Two common approaches are cost of treatment and lost
productivity. Since lead poisoning is not likely to actually cause death (although it can) a
statistical value of life is not necessary.
b. The Hedonic Method is the best method for determining the detrimental harm of noise.
The negative effect of airplane traffic is likely to be capitalized into the value of the
homes.
c. You want to determine the Existence Value of the California condor. The Contingent
Valuation Method is probably your best bet. Although, you could argue that people
travel to see the few condors that have been released into the wild.
d. The productivity of the land is at stake. Compare the ability to grow crops before the
weather patterns change to the projected ability to grow crops after the projected
weather change.
e. The value of the lost work (regained) would be the value of the rule.
3. Compliance cost
Original Market
160
140
120
Price
100
80
Demand
60
MC
40
20
0
0
100
200
300
400
Quantity
a.
b. The equilibrium quantity (set 15 = 150 – 0.5*Q) is 270 (thousand). Consumer surplus is
270*(150-15)/2 = $18,225 (thousand).
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ECON 3680
Homework 3 Answers
c. If you multiply the current level of output (270) times $2.50 you get $675 (thousand)
d. The industry ignores that fact that with the added cost (redraw the MC curve with the
additional cost) the equilibrium quantity will fall.
e. At a MC of $17.5 per unit the equilibrium quantity will fall to 265 (thousand). This
means compliance cost will only be $662.5 (thousand).
4. Alligator Farm
Alligator Farm
Benefit/Damage ($)
250
200
150
MB
100
MD
50
0
0
20
40
60
80
100
120
Alligators
a.
b. At 100 alligators (the number kept if there is no effort to abate damage) and no fence,
the marginal damage done to the poodle owner is $50. The total damage is 100*50/2 =
$2,500.
c. If the fence is purchased it will prevent all of the damage from occurring. It costs $2,000
and prevents $2,500 of damages, so it does improve overall welfare.
d. 0.5*A = 200 – 2*A  A = 80, MD = 40, TD = 40*80/2 = $1,600, lost profits = (10080)*40/2 = $400.
e. You will be indifferent. The amount you will owe the poodle breeder and your lost
profits at A = 80 is equal to the cost of the fence.
f. The poodle breeders are also indifferent. Without the fence they will also find it
desirable to reduce the alligator herd to 80 alligators. The rest of the math stays the
same.
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