[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

the externality through fines or taxes and through subsidies.
Illustrate the effects of taxes and subsidies by
drawing the appropriate supply and demand graphs.
(Don’t bother worrying about the exact units.) Why are
economists likely to prefer fines to subsidies?
3. Consider a small lake with a certain number of fish. The
more fish that one fisherman takes out, the fewer fish
are available for others to take out. Use graphs depicting
private and social costs and benefits to fishing to
describe the equilibrium and the socially efficient level
of fishing. Explain how a tax on fishing could achieve the
efficient outcome. Explain how giving a single individual
the property right to the fish in the lake might also be
used to obtain an efficient outcome.
The more fish taken out this year, the fewer fish will
be available next year. Explain why if there is a single
owner for the lake, the fish will be efficiently extracted
from it. Assume that anyone who wants to fish can do so.
Would you expect that too many fish would be taken out
this year?
4. Consider a crowded room with an equal number of
smokers and nonsmokers. Each smoker would be willing
to pay $1.00 to have the right to smoke. Each nonsmoker
would be willing to pay $0.50 to have the room free from
smoke. Assume there is a rule that says no smoking is
allowed. Could everyone be made better off if smoking
is allowed? How? If property rights to clean air are
assigned to the nonsmokers, how might the efficient outcome
be obtained? What difference does it make to the
outcome whether there is initially a rule that smoking is
allowed or that smoking is not allowed? What problems
might you envision occurring if no smoking is allowed
unless all the nonsmokers agree to allow it?
5. The following table gives the demand for water for two
households, the Joneses and the Lopezes. Suppose these
two households are the only ones in the market. Draw
the individual demand curves for each household and
the market demand curve. If the total quantity of water
available is 80 units, what price would equate demand
and supply?
Assume the local water authority has set the price
at 3. Now suppose there is a water shortage, and the
total quantity of water available falls to 60 units.
Suppose the local water authority keeps the price
unchanged and rations the available water supply, with
each household receiving 30 units. What is the marginal
benefit of an extra unit of water to the Joneses? to the
Lopezes? Is the allocation of water between the two
households efficient? Suppose the water authority let
the price of water rise until market demand equated
supply (60 units). How much would the Joneses consume?
How much would the Lopezes consume? Is the
allocation efficient?
Demand by Demand by
Price the Jones family the Lopez family
2 50 40
3 45 35
4 40 30
5 35 25
6 30 20
7 25 15
8 20 10
420 ∂ CHAPTER 18 ENVIRONMENTAL ECONOMICS