Consider the situation for pollution characterized in the figures below. Assume that transaction costs are high, so that no bargaining solution is possible. For Externality #1:

a.Compared to the optimal allocation, what is the deadweight loss of a situation where polluters have a right to pollute (no liability)?

b. Compared to the optimal allocation, what is the deadweight loss of a situation where the polluters have no right to pollute (full liability)?

For externality #2:

c.Which property right entitlement is a Pareto improvement over the opposite entitlement?

d. Which property right entitlement is socially efficient relative to the opposite entitlement? What is the difference in social welfare between the two (hint: compare each to the optimal allocation, compute your answer in $)?

e. Repeat part d for Externality #3.

Externality #1 32 30 28 MEC 26 24 22 MB 20 18 MARGINAL COSTS/BENEFITS 16 14 12 10 00 6 4 2 2. 0 O 1 2 2 3 7 B 8 9 10 4 5 6 LEVEL OF THE EXTERNALITY Externality #2 22 20 MEC 18 16 14 MARGINAL COSTS/BENEFITS 6 MB 4 2 0 0 1 2 3 4 5 6 7 8 9 10 LEVEL OF THE EXTERNALITY Externality #3 22 20 MB 18 16 14 MARGINAL COSTS/BENEFITS MEC 4 2 0 0 1 2 3 7 8 9 10 4 5 6 LEVEL OF THE EXTERNALITY Externality #1 32 30 28 MEC 26 24 22 MB 20 18 MARGINAL COSTS/BENEFITS 16 14 12 10 00 6 4 2 2. 0 O 1 2 2 3 7 B 8 9 10 4 5 6 LEVEL OF THE EXTERNALITY Externality #2 22 20 MEC 18 16 14 MARGINAL COSTS/BENEFITS 6 MB 4 2 0 0 1 2 3 4 5 6 7 8 9 10 LEVEL OF THE EXTERNALITY Externality #3 22 20 MB 18 16 14 MARGINAL COSTS/BENEFITS MEC 4 2 0 0 1 2 3 7 8 9 10 4 5 6 LEVEL OF THE EXTERNALITY