Q1. (10 marks) Lead production creates a significant pollution externality. The

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Q1. (10 marks) Lead production creates a significant pollution externality. The figure below depicts the market for lead in the hypothetical country of Leadland. $ Price Per KG MSC 1.8? MC 1.50--- 1.20L MB Quantity (KG '000s) 500 700 a) In an unregulated market, what quantity would be traded? What is the socially optimal level of b) The government of Leadland has decided to introduce an excise tax to correct the extemality. What c) An economic advisor to the government has suggested that allocating property rights is an alternate production? Calculate the dead weight loss associated with the unregulated outcome? (3 marks) per kilogram tax rate should the government introduce and why? (3 marks) solution to the pollution externality. Outline the basic idea of the Coase theorem and make a case whether or not you agree with the advisor based on the underlying assumptions of the Coase theorem. (4 marks)

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Ans

1 700 would be traded as decided by intersection of Mc and MB curve . Social optimum level is 500 as determined by intersection of MSc and MB. Deadweight loss =1/2(1.80-1.20)(700-500)=60

B tax rate should be (1.50-1.20)/1.20. (100)=25%.This tax is need to make Mb=MSc and achieve socially optimal level

C coase theorem says when transaction costs are low bargaining between parties regarding conflicting property rights will led to efficient outcome no matter in whose favour property rights are distributed..we do not agree with the adviser because there are too many people who get affected by pollution and thus transaction costs are not small enough.

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