Homework 8- Policy Instruments

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 farm produces a negative externality of $1.5 per bushel. 1. Let's look at a using a regulation as compared to the tax. a. Regraph the original solution. With and without the tax. Show all prices, quantities and the amount of tax. b. Regraph the quota that yields the same quantity produced as the tax would have yielded. C. Now, show why the producer prefers the regulation (Quota) to a tax, considering that they will be forced one way or another to address the externality. Focus on their revenue with a tax, as opposed to with 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. In homework 7 we compared a tax with farm programs that support prices (price support and deficiency payment). The tax increased prices, but not to producers. The price support programs increased prices and quantity sold. Suppose that the government funded research and education to reduce pollution, instead of a tax. Further suppose that researchers discover a way to eliminate the $1.50 externality. What would that do to the supply curve? Compare this to the Pigovian tax. Who wins, who loses? 3. Let's focus on property rights. a. List the four types of properties. b. Describe how you're answers for Pigovian taxes would be affected if the government simply said that water 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 4" amendment to the Constitution implies. d. What would the farmers have to do to overturn this ruling? That is, what would make it a takings