Reference no: EM13699672

8. In the 1980s, a Holiday Inn was built on Frontage Road in Newark, next to MTM Shredding. MTM had been there for years, and it used heavy machinery to compact and shred cars. Every once in a while, something went wrong at MTM and the Holiday Inn swimming pool was bombarded with shrapnel. This happened about once for every 500 cars that MTM shredded.
a. If nothing is done, and no legal doctrines cover this situation (where both MTM and Holiday Inn operate as normal, with occasional shrapnel showers at Holiday Inn pool), explain why it might be inefficient. Under what circumstances might it be efficient?
b. Outline how Pigouvian taxes could be used in this situation. How would you calculate the Pigouvian tax that would lead to the efficient outcome? Explain why the outcome is guaranteed to be efficient if this tax is implemented.
c. Suppose the Holiday Inn's property rights include the right to be safe from shrapnel bombardment, and they and their guests can sue for damages if a shrapnel bombardment occurs. Explain why the outcome is guaranteed to be efficient if the courts enforce this property right.
d. Suppose instead that MTM's property rights include the right to shred cars to its hearts content (since they were there first and these was no problem until Holiday Inn arrived). Explain why the outcome is guaranteed to be efficient if the courts enforce this property right.