1. Four stores have a problem with theft and security is a public good. Let S stand for the number of person-hours of security patrols per week. The marginal benefit of security patrols to each of the stores is given by the formula MB = 200 - 2Q. Patrols cost $25 per hour.
a) What is the socially efficient level of security?
b) If each store provided security independently, how much would each store provide?
c) Draw a diagram to illustrate your answers.
2. A paper mill discharges gunk that causes damage of $200 to the fishermen's business. The pollution damage can be eliminated in one of two ways: the mill can install a filter at cost $300 or fishermen can install a water treatment plant at cost $100.
a) Identify the efficient outcome.
Assume the fishermen have property right to no Pollution (and the property right is protected
by compensatory damages)
b) Construct a game matrix to illustrate the interaction between the factory and the resident.
c) Suppose first that it is prohibitively expensive for the mill and fishermen to negotiate. What will the outcomes?
d) Suppose instead that the mill and fishermen can bargain costlessly. What will the outcomes be? Note: Apply the Nash bargaining solution where any gain from a bargaining is shared evenly between parties.