C. Simple Coase/ Complex Coase

The demand for mushrooms from one farm is Qd=21-(1/5)P. The cost to this farmer of producing his mushrooms is TPC=9Q+(3/2)Q². But growing mushrooms often causes a smell that disturbs neighbors. The bother to neighbors is TD=12Q+2Q². (Q= unit of mushrooms)

1. If the mushroom farmer does not take the bad smell imposed on his neighbors into account, how units of mushrooms will he produce? What is the NPB for the farmer? What is the NSB for society?

2. What is the optimal number of units of mushrooms (for society) from this farm? What is the NPB for the farmer at this optimal number? What is the NSB for society at this optimal number?

3. Suppose there are no transactions costs (negotiations between the farmer and neighbors are easy and free) and a judge rules that the farmer is not allowed to bother neighbors without their permission. How many units of mushrooms will be produced? How does this happen? Explain. (What is the exact net benefit for the farmer? What is the exact net benefit for the neighbors?)

4. Suppose there are no transactions costs and a judge rules that the farmer is allowed to produce as much bad smell as he wants. How many units of mushrooms will be produced? How does this happen? Explain. (What is the exact net benefit for the farmer? What is the exact net benefit for the neighbors?)