The following information is extracted from an article 1 about environmental problem caused by oil and gas companies in United States (US). An unprecedented wave of lawsuits, filed by cities and states across the U.S., aim to hold the oil and gas industry to account for the environmental devastation caused by fossil fuels and covering up what they knew along the way. Coastal cities struggling to keep rising sea levels at bay, midwestern states watching "megarains" destroy crops and homes and fishing communities losing catches to warming waters, are now demanding the oil conglomerates pay damages and take urgent action to reduce further harm from burning fossil fuels. In 1979, an Exxon study2 said that burning fossil fuels "will cause dramatic environmental effects" in the coming decades. But instead of heeding the evidence of the research they were funding, major oil firms worked together to bury the findings and manufacture a counter narrative to undermine the growing scientific consensus around climate science. Suppose that the market for fossil fuels in a particular region in US has the supply and demand curves as below: Demand: P=1800.0007QD Supply: P=150+0.0003Qs, The production of fossil fuels cause "mega rain" and it destroy the crops in the region. The marginal external cost associated with the fossil fuels production is given by the expression: MEC=0.0005Q ( You don't need to draw diagram from part a) to part c). But, you need to show your steps!) a) Based on the information, calculate the competitive equilibrium and social optimal equilibrium. (6 marks) b) Suppose that the US government restricts the fossil fuels production at social optimal output. What is the net gain to the society? (4 marks) c) The US government rules that the farmers own the right of clean environment. Show the bargaining range at Q=0 and Q=30,000. Why is it so difficult to achieve consensus in private bargaining in practice? (6 marks) d) Assume that the mega rain caused by fossil fuel production leads to $2 million losses to the farmers in the region. The court in US judges that the oil companies need to compensate the farmers. Suppose that the oil companies offer three compensation packages to the farmers. Package A covers 25% of the loss, package B covers 50% of the loss and package C covers 80% of the loss. The farmers can choose to accept or reject the package. If the farmers reject the package, they need to bear all the losses. Notice that the compensation paid by the oil companies represent a loss to oil companies themselves. Copyright Statement: The contents contained in this paper are copyright protected. Except with the prior written permission of City University of Hong Kong and/or other relevant copyright owners, no person may duplicate, edit, publish, make available or disseminate any content contained in whole or in part in this paper. This document is available free of charge on SUD CU.COM Downloaded by Adel Musakeva (adeliamsv1@gmail.com) Draw a game matrix and find the Nash in the game. What can the US government do to improve the outcome of the game in favour of the farmers? (9 marks) The following information is extracted from an article 1 about environmental problem caused by oil and gas companies in United States (US). An unprecedented wave of lawsuits, filed by cities and states across the U.S., aim to hold the oil and gas industry to account for the environmental devastation caused by fossil fuels and covering up what they knew along the way. Coastal cities struggling to keep rising sea levels at bay, midwestern states watching "megarains" destroy crops and homes and fishing communities losing catches to warming waters, are now demanding the oil conglomerates pay damages and take urgent action to reduce further harm from burning fossil fuels. In 1979, an Exxon study2 said that burning fossil fuels "will cause dramatic environmental effects" in the coming decades. But instead of heeding the evidence of the research they were funding, major oil firms worked together to bury the findings and manufacture a counter narrative to undermine the growing scientific consensus around climate science. Suppose that the market for fossil fuels in a particular region in US has the supply and demand curves as below: Demand: P=1800.0007QD Supply: P=150+0.0003Qs, The production of fossil fuels cause "mega rain" and it destroy the crops in the region. The marginal external cost associated with the fossil fuels production is given by the expression: MEC=0.0005Q ( You don't need to draw diagram from part a) to part c). But, you need to show your steps!) a) Based on the information, calculate the competitive equilibrium and social optimal equilibrium. (6 marks) b) Suppose that the US government restricts the fossil fuels production at social optimal output. What is the net gain to the society? (4 marks) c) The US government rules that the farmers own the right of clean environment. Show the bargaining range at Q=0 and Q=30,000. Why is it so difficult to achieve consensus in private bargaining in practice? (6 marks) d) Assume that the mega rain caused by fossil fuel production leads to $2 million losses to the farmers in the region. The court in US judges that the oil companies need to compensate the farmers. Suppose that the oil companies offer three compensation packages to the farmers. Package A covers 25% of the loss, package B covers 50% of the loss and package C covers 80% of the loss. The farmers can choose to accept or reject the package. If the farmers reject the package, they need to bear all the losses. Notice that the compensation paid by the oil companies represent a loss to oil companies themselves. Copyright Statement: The contents contained in this paper are copyright protected. Except with the prior written permission of City University of Hong Kong and/or other relevant copyright owners, no person may duplicate, edit, publish, make available or disseminate any content contained in whole or in part in this paper. This document is available free of charge on SUD CU.COM Downloaded by Adel Musakeva (adeliamsv1@gmail.com) Draw a game matrix and find the Nash in the game. What can the US government do to improve the outcome of the game in favour of the farmers? (9 marks)