Reference no: EM132401204

A popular coffeeshop opens until late at night. The customers are noisy, and nearby residents find it hard to sleep. The following table reports the coffeeshop's marginal cost of staying open later than 10pm, together with the marginal cost to residents who are affected by noise. The Coffeeshop's marginal revenue of staying open is $160 per hour. 

Time of Operation Coffeeshop's Marginal Cost  Residents' Marginal Cost

10pm - 11pm $120 $0

11pm - 12am $140 $20

12am - 1am $160 $40

1am - 2am $180 $80 

(i) What time would the coffeeshop prefer to open until? What time would the residents prefer that the coffeeshop open until? Explain the difference between these timings, if any.

(ii) From society's point of view, what time should the coffeeshop operate until, and why? Provide a solution that would allow residents to accept this operating time, or show why a solution is not needed.

(b) Many Chinese traditionally burn joss paper to respect their ancestors. However, burning joss paper creates air pollution. There are two solutions proposed: (1) a private good of home air purifiers for affected households and (2) a public good of a 'clean' joss burner that purifies exhaust from burning. 

Suppose there are two affected households. The marginal benefit of an air quality improvement of Q for each household is given by: Q = 100 - 5P.

(i) Specify the aggregate demand curve for (1) Home air purifiers and  (2) a 'clean' joss burner.

(ii) The marginal cost of air quality when provided via (1) Home air purifiers is $10, and when provided via (2) 'clean' joss burners it is $15. Discuss which solution would efficiently generate higher air quality for each household and why.  

(Hint: If you have difficulty computing the aggregate demand curve in (bi), provide an argument based on economic principles)