The demand for mushrooms from one farm is Qd=19-(1/4)P. The cost to this farmer of producing his mushrooms is TPC=6Q+(3/2)Q2. But growing mushrooms often causes a smell that disturbs neighbors. The bother to neighbors is TD=4Q+2Q2. (Q= unit of mushrooms)

1. If the mushroom farmer does not take the bother to their neighbors into account, how units of mushrooms will he produce? What is the NPG for the farmer? What is the NSG for society?

2. What is the optimal number of units of mushrooms (for society) from this farm? What is the NPG for the farmer at this optimal number? What is the NSG for society at this optimal number?

3. Suppose there are no transaction costs (negotiations between the farmer and neighbors are easy and free) and a judge rules that the farmer is not allowed to bother neighbors without their permission. How many units of mushrooms will be produced? How does this happen? Explain. (What is the exact net benefit for the farmer? What is the exact net benefit for the neighbors?)

4. Suppose there are no transaction costs and a judge rules that the farmer is allowed to produce as much bother as he wants. How many units of mushrooms will be produced? How does this happen? Explain. (What is the exact net benefit for the farmer? What is the exact net benefit for the neighbors?)

5. In reality, there are many neighbors and only one farmer. It costs the neighbors $200 (in time and effort) to get all the neighbors together and agree to make an offer to the farmer to reduce bother. (I.e. should neighbors living closer to the farm pay more than ones who live farther away?) But farmer can make an offer to the neighbors to allow bother at no negotiation cost at all. What happens now if the judge rules that the farmer is allowed to make as much bother as he wants? How many units of mushrooms will be produced? Explain. (What is the exact net benefit for the farmer? What is the exact net benefit for the neighbors?)

6. If you were the judge and you want society to achieve the optimal outcome and you knew that it would cost neighbors $200 to negotiate, but would cost the farmer nothing to make an agreement with neighbors, how should you rule? Should the farmer be allowed to make as much bother as he wants or should the farmer not be allowed to make bother without the neighbors permission? Explain.

7. Why would Block (from our readings) disagree with your answer to #6? Explain.