Law & Economics. 50 Points Total 1. Consider the following case: There is a factory that makes $500,000 profits from pro- ducing widgets annually while causing $100,000 worth of damage to a neighborhood downwind. The factory could install a device on their smokestacks to eliminate the pol- lution for $50,000. The neighborhood could be torn down and turned into an industrial complex for $250,000. (a) If we make no assumptions about liability and property rights, what is the efficient outcome and why? (5 points) I (b) If a court determines that the factory is liable for the damage, what is the efficient outcome? (5 points) (c) If the Environmental Protection Agency (EPA) decides to issue a fine of $40,000 to the factory, what is the efficient outcome? (5 points) I (d) If the EPA raises the fine to $60,000, what is the efficient outcome? (5 points) 1 2. Assume that cattle rancher and a farmer live on adjacent properties. The cattle like to cross over the property line and eat some of the farmers' crops (a) If the two parties do not bother to negotiate an agreement, what can we assume? (Be explicit) (5 points) I (b) Assume that the rancher has to pay damages to the farmer. What 2 things prevent the farmer from over-planting his farm? (5 points) (c) Once property rights are clearly defined, how do we know that economic efficient outcome will be achieved? (5 points) 3. Pigou argues that the way to fix the negative externality is through a State action (most likely a tax). What key assumption does he have to make in order for him to be correct? (5 points) 4. Why it is important for there to be a thing such as private property? Why is everything not private property? (5 points) 5. Imagine that people are starting to colonize Mars. (a) What two possible ways are there to give people land on Mar? (2 points) (b) Which way is more efficient and why?(2 points) (c) Why might someone want to use the inefficient method? (1 point)