Homework 8: Other Policy Instruments Covering Part 8 Let's return to homework 7. Recall that: Demand: P=7-2Q Supply: P=4+Q Where P is output price in $/bushel and Q is billions (1,000,000,000s) of bushels. Recall that this crop production results in a negative externality of $1.50 per bushel. 1. Let's look at using a regulation as compared to the tax. a. First, for comparison, regraph problem 2 from Homework 7, with and without the tax. Show all prices, quantities and the amount of tax. P $7 ($/ bushel) $6 $5.50 $5 $4.50 $4 0 0.5 1 (Billions of bushels) Q b. On the same graph, show a quota that yields the same quantity produced as the tax would have yielded. . Now, show why producers prefer the regulation (in this case, the quota) to a tax, considering that they will be forced one way or another to address the externality. Focus on producers' surplus under tax vs under the quota. d. Provide two more reasons that producers might prefer to have a regulation to address the negative externalities associated with producing wheat. Include an example to describe what you mean for each reason. 2. Now, instead of taxes or quotas, suppose that the government funded research instead, in an effort to reduce pollution. Suppose researchers at CSU's Wheat Breeding Program developed a rust resistant wheat that doesn't need to be sprayed. Now farmers don't have the variable costs of spraying the fungicide, and they have fewer yield losses. And it eliminates the $1.50/bushel negative externality. Compare this policy outcome to the Pigovian tax. Who wins, who loses? 3. Let's focus on using property rights as a policy instrument to deal with the negative externality related to fungicide uses: a. First, list the four main kinds of property. b. Describe how the market and the various groups (producers, consumer, etc) would be affected if the government simply said that water rights owners had a right not to be polluted by farmers. c. What property rights concept/law allows the government to take away the farmers rights by simply declaring that water users have full rights not to be polluted? Explain why the government does not have to compensate farmers as the 5th amendment to the Constitution implies. d. What would the farmers have to do to overturn this? That is, what would they have to prove for it to be considered a \"takings\"? 1 A | 7 - 2 Q = 4+Q P = 7 - 2 ( 1 ) = P=>b 7- 4 = 4 + 2Q 1 = Q The total estimated externality cost - Q X 1,5 -1 x 1.5 - 12. 50 / unit 1 B I A tax designed to correct a negative externality is a Pigourian Tax. 4 ( | 7 - 2 Q = 4+Q + 1. 5Q Q= 2/3 = 0.67 units 7-26= 2.54+ 4 Tax = 1. 50 x 0. 67 = $1. 005 7 - 4 = 2. 5 Q + 2Q 3 = 4.5 Q 3/ 4. 5 = Q 2 41 Price paid by buyer ( Ptax ( B) Price seller recieves ( Quax (S) ) P= 4+Q+ 1.50 or P= 5.50+Q Ptax ( 13 ) = $16 Qlax (5)= $1.50 5.5+ Q = 7-2Q Supply Tax 3Q = 1.5 Supply Q = 0. 5 units LINWIGIO 0 .5 1 1. 5 2 2.5 3 3.5 2 B / New supply bend: P- 4+Q Request bend: P= 7- 2Q 4+ Q = 7- 2Q ( S = 0. 5 x 7 x (7-5 ) = 1 Q + 2=7-4 p s = 0 , 5 x 1 x 5 - 4 = 0.5 36 = 3 Q = 1 0' ( 1 billion bushels ) Supply bend = P= 5. 5+ 9 Request bend = P= 7-2