Answer Happy

Question 5. [20 marks] Suppose that pig farming in a region is a perfectly compet- itive industry. However, one negative consequence of this activity is that it creates water pollution that adversely affects the health of the residents in the nearby communities that rely on the water sources that are contaminated by the pig farms. The market supply curve for pigs (or hogs) is given by HS = 6p where HS is the quantity of hogs supplied to the market by farmers in this region. The market demand for hogs is given by HP = 300 – 4p. The government estimates that the additional medical costs (M) imposed on the nearby communities is given by M = 5H, where H is the quantity of hogs produced and sold in the market. (a) [10 marks] In the absence of clearly defined property rights over water use or con- ventions or some form of government intervention, derive the market equilibrium for hogs and the DWL resulting from the additional medical costs associated with hog production. (b) [5 marks] Suppose the property rights to clean drinking water are assigned to the neighbouring communities. Furthermore, assume that the cost function of each of the numerous hog farms in the area is identical. What is the potential Coasian outcome and discuss whether or not you think this solution is likely to be achieved in private negotiations. (c) [5 marks] Concerned about the outbreak of waterborne disease, the government decides to intervene in the hog market. Discuss two interventions, a Pigouvian tax and a production quota, that the government could consider to achieve a socially optimal level of hog production. If the government did not know precisely the demand and supply curves for hogs but it did know the additional medical costs from hog production was M(H) = 5H which of the two interventions could still be employed to achieve a socially optimal level of hog production.