1. The EU favours agricultural production in mountainous regions. Can you imagine a reason, why
this might be efficient?
2. Around a lake there are three pollutants of the water.
Firm
Initial Pollution Level
Costs of Reducing pollution by one unit
A
70 units
€ 200
B
80 units
€ 250
C
50 units
€ 100
Government wants to reduce pollution to 120 units.
(i) What are the costs if it is ordered that each firm has to reduce its pollution to 40 units?
(ii) What are the costs of the reduction if each firm is given a 40-unit pollution permit which they can
sell? Who sells and who buys?
3. Consider the market for fire extinguishers.
(i) Does it a have a positive externality if somebody buys one?
(ii) Draw a graph of the market for fire extinguishers labelling the demand curve, the supply curve
and the social value resp. the social cost curve.
(iii) Show the market equilibrium and the social optimum. Can they be different?
4. A likes to play loud rock music. Her neighbour B hates rock music. He likes to listen to Bruckner
symphonies and Wagner operas, which in turn drives A to nuts. Unfortunately the wall between the
two apartments is very thin.
(i) What is the externality?
(ii) What command-and-control policy might the landlord impose? Will this be efficient?
(iii) Suppose the landlord does nothing. What could A and B do to maximize their welfare?