As seen from the excel sheet we conclude that the NVP for Project 1 results in negative amounts, as a result we do not choose project 1. As for project 2 amongst the two options we will choose Project two with DR at 10% as it yields a higher NVP value.
Question 2
a) What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market?
6 tons per day
b) What is the efficient quantity of fertilizer?
4 tons per day
c) Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax?
Consumers will pay $1,200 per ton, and the efficient level of output at 4 tons per day will be achieved.
d) At the output level in part (6), how much is the tax per one ton?
$1200 - $800 = $400
e) How much tax revenue does government collect?
$400 per ton x 4 tons per day = $1,600 per day
f) What is the deadweight loss borne by society if the externality is left uncorrected?
(6-4)x(1,600-1,000)/2 = $600
Question 3
a)
According to Coase theorem it doesn’t matter who builds the fence as long as it is less than the cost of the crop damage. However, to answer the question; the rancher builds the fence, because the cost of the fence ($100) is less than the cost of compensating the farmer for crop damage. Together, the rancher and the farmer are $200 better off ($300 crop damage less $100 fence). The Coase theorem doesn't predict how the gains will be shared - they could be shared equally between farmer and rancher, or the rancher could enjoy the full benefits of not having to pay for crop damage.
b)
If the farmer were responsible for building the fence then it would cost her $400 to build a fence while the crop damage is only $300. Economically it does not make sense for
