Question 4

(a) It is common for palm oil companies to use fire to clear their palm oil plantation land prior to growing in palm oil trees. However, in the clearing process, the residents at the vicinity of the palm oil planation suffer. The air becomes extremely polluted, resulting in many people falling sick. The poor visibility also results in higher risk of accidents for land and air transport in the vicinity. Analyse with a suitable market diagram, the type of problem in the palm oil market and comment on its efficiency. What should the palm oil companies do if the residents have the right to enjoy clean air at the vicinity of the palm oil plantation?

(10 marks)

(b) Consider 3 consumers of firework display, A, B and C with individual demand functions QA = 40 - 0.5PA, QB = 30 - 0.25PB and QC = 10 - 0.2PC, respectively. If the marginal cost of firework display is a constant amount that is equal to 30, compute the optimal quantity of firework display. If the private market successfully prevents those who do not pay the fee for the firework display and charges $100 for the entrance fee, which customer will pay for the firework display and what is the quantity consumed? Explain.

(10 marks)

(c) "In the process of searching for information using search engine such as Google, the search process should end before all the hits are considered". Explain the validity of the statement in the context of economics of information.

(5 marks)