Reference no: EM132367241
Herb's Dog Walking Service and Kurt's Scenic Pacific Beach Walking Tours operate the same neighborhood. The dogs Herb walks relieve themselves in the same areas Kurt's customers walk and this imposes a cost on Kurt. Assume not "curb" (clean up the waste of the dogs he walks).
1. Herb's units of dog walks by x, and his cost of producing x units is x
2. his marginal cost is 2x. Herb can sell as many units as he wishes at a price of $60 per unit. Kurt can produce w units of waking tours at a cost of w 2 + 20x. So marginal cost of production is 2w. Kurt can sell as many units as he wishes at price of $60 per unit. Since Herb's production imposes a cost on Kurt, the social marginal cost of dog walks is given by 2x + 20. Note that Kurt's production does not impose a cost on anyone else.
Assume that Herb and Kurt are the only relevant parties to this problem.
(a) Assume the externality is allowed and no steps are taken to avoid it. What is the profit-maximizing quantity of x that Herb produces, and what are his profits? What is the profit-maximizing quantity of w that Kurt produces, and what are his profits?
(b) What are the socially optimal levels of x and w?
(c) Now suppose that Herb has the right to pollute with his dog walking. Assume that Herb and Kurt are not able to sort out a way to reduce/limit the pollution (perhaps Herb has a bad back and is unable to pick up after the dogs). Assume it is costless for them to negotiate (assume the Coase Theorem applies) and the outcome of their negotiation is given by the standard bargaining solution with equal bargaining weights. What is the outcome of the bargaining? Describe the output of each and any transfers.
(d) Now suppose that Herb discovers that he can carry a bag with him and pick up after the dogs he walks at a cost of 2x. That is, cleaning up after the dogs implies a cost for Herb of x 2 + 2x and a marginal cost of 2x + 2. Now what is the socially optimal outcome?
(e) Again assume that Herb has the right to pollute with his dog walking, but that Herb is able to clean up after the dogs as in part (d). Assume it is costless for them to negotiate (assume the Coase Theorem applies) and the outcome of their negotiation is given by the standard bargaining solution with equal bargaining weights. What is the outcome of the bargaining? Describe the output of each and any transfers.