Answer Happy

Moonshine - homemade hard liquor, usually distilled from corn - has a long tradition in the U.S., and many people enjoy making it at home for their own consumption. Suppose that each time someone in Madison starts making moonshine at home, it imposes $1,000 worth of harm on their neighbors due to the fumes. 300 people in Madison are considering becoming moonshine distillers as a hobby, but they vary in how much enjoyment they would get out of it: 100 of them would get a private benefit of $400 each, 100 would get a benefit of $900 each, and 100 would get a benefit of $1,400 each. (a) What's the efficient number of people making moonshine at home in Madison? In the absence of any regulation of home distilling, is the number of people making moonshine likely to be the efficient number, higher, or lower? Explain. (b) Suppose home distilling was regulated as a nuisance, using a damages rule. How much would compensatory damages be, and how many people would choose to make moonshine? (c) Suppose that only 50% of home distillers would be detected and successfully sued. How many people would choose to make moonshine if they were only liable for compensatory damages? Explain how punitive damages could be used to correct this problem.