Suppose that all people in a village graze cows in a common field. No one owns this land and entry there is not restricted. The cost of buying a cow is 10 monetary units and the only value accrued from the cow is the milk it produces. The more cows go into the common field, the more overgrazed it becomes and the less milk per cow is generated. More precisely, the monetary value of milk per cow for each owner is measured as100 c, wherecis the total number of cows in the village. In addition, the marginal social benefit of one additional cow is calculated as100 2c.

2

a)As long as it is profitable to purchase a cow, someone will have an incentive to do so. Using this insight, determine how many cows the village will raise when use of the common field is unregulated. Explain.

b)What is the net value of raising cows under the competitive outcome you described in the previous question?

c)If a social planner could set the number of cows raised by the village, what should this number be? What is the net value of raising cows for society as a whole in that case? Explain.

d)What practical solution can you provide to make sure this village experiences an efficient outcome? Explain.