Exam 18: Externalities, Open-Access, and Public Goods

Two neighboring farmers must each decide whether to contribute to a fence that separates their properties.The fence costs a total of $20.Both farmers currently have a profit of $30 each.With a fence to keep each farmer's animals from wandering onto the other's property,both farmers would experience a $15 rise in profits.Draw the payoff matrix and discuss the possible outcomes.

A firm operates and produces pollution that only harms an individual,Bob.The firm and Bob both know the costs and benefits of reducing pollution.Neither the firm nor Bob acts strategically while bargaining,and there are no transaction costs associated with bargaining.Explain how the efficient level of pollution occurs no matter whether the firm or Bob owns the property right to pollution.

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's Theorem,the optimal level of trash in the park can be achieved if