in efficient pollution reduction. How do
these approaches target the firms that should
undertake bigger reductions?
7. The many identical residents of Whoville love
drinking Zlurp. Each resident has the following
willingness to pay for the tasty refreshment:
First bottle $5
Second bottle 4
Third bottle 3
Fourth bottle 2
Fifth bottle 1
Further bottles 0
a. The cost of producing Zlurp is $1.50, and
the competitive suppliers sell it at this price.
(The supply curve is horizontal.) How many
bottles will each Whovillian consume? What
is each person’s consumer surplus?
b. Producing Zlurp creates pollution. Each
bottle has an external cost of $1. Taking this
additional cost into account, what is total
surplus per person in the allocation you
described in part (a)?
c. Cindy Lou Who, one of the residents of
Whoville, decides on her own to reduce her
consumption of Zlurp by one bottle. What
happens to Cindy’s welfare (her consumer
surplus minus the cost of pollution she
experiences)? How does Cindy’s decision
affect total surplus in Whoville?
d. Mayor Grinch imposes a $1 tax on Zlurp.
What is consumption per person now?
Calculate consumer surplus, the external cost,
government revenue, and total surplus per
person.
e.Based on your calculations, would you
support the mayor’s policy? Why or why not?
8. Ringo loves playing rock ‘n’ roll music at
high volume. Luciano loves opera and hates
rock ‘n’ roll. Unfortunately, they are next-door
neighbors in an apartment building with
paper-thin walls.
a. What is the externality here?
b. What command-and-control policy might the
landlord impose? Could such a policy lead to
an inefficient outcome?
c. Suppose the landlord lets the tenants do
whatever they want. According to the Coase
theorem, how might Ringo and Luciano
reach an efficient outcome on their own?