Consider the generalized externality problem. Assume the damage and cost functions are given by:

(a) Determine the non-regulated level of E if the polluter has the right to pollute.

(b) Determine the level of E under the polluter-pays principle.

(c) Determine the efficient solution.

(d) Determine the payoffs for both parties under no regulation and the polluter-pays principle for α=1, β=2 and γ=3.

Assume now there are transaction costs of Tr=1/240.

(e) Which contract will the household suggest to the polluter if the polluter has the right to pollute and the household has to pay the transaction costs? What are the final payoffs to both parties?

(f) What will be different if the polluter has to bear the transaction costs?

(g) Which contract would the polluter suggest to the household if the household has the right to a clean environment and polluter has to pay the transaction costs? What are the final payoffs to both parties?

Transcribed Image Text:

C(E)= E-a- 2 D(E,y)=y-B-yEy, ap.y>0. 2