Homework 3

due March 1 Tuesday

K Foster, Economics of Environment, Eco B9526, CCNY

Spring 2011

You are encouraged to form study groups to work on these problems.  However each student must hand in a separate assignment: the group can work together to discuss the papers and comment on drafts, but each study group member must write it up herself/himself.  When emailing assignments, please include your name and the assignment number as part of the filename.

Please write the names of your study group members at the beginning of your homework to acknowledge their contributions.

1. Carefully explain an example of an environmental problem affecting New York and explain the Coase-type solution. What might Ostrom add to this? Which version of the explanation seems more compelling to you?

2. Consider two firms situated near to each other: a brewery (which needs clean water) and a tannery (which expels dirty water). The tannery currently emits 50 units/day of chemicals into the water. Its marginal costs of reducing these emissions, where reductions of emissions are q, is 8q. The brewery's marginal costs of cleaning the chemicals out of the water before using the water are proportional to twice the level of the pollutant.

1. In the absence of regulation or negotiation, what level of emissions would the tannery emit? What would be the marginal costs to the brewery to clean the water again?
2. What amount of emissions would be chosen if both firms were owned by a single company (or would be chosen by a social planner)?
3. What would the Coase Theorem suggest could be an expected outcome? How much would the brewery be willing to pay to lobby for a law requiring clean water? How much would the tannery be willing to pay to lobby for a law allowing unlimited emissions?