4. The table below provides information about costs and benefits from the production of
pesticides that pollutes a lake used by a trout farmer
TP of pesticides/
week
Pesticides
producer Mc
Marginal external
costs
Marginal Social
benefits
0
0
0
250
1
5
33
205
2
15
67
165
3
30
100
130
4
50
133
100
5
75
167
75
6
105
200
55
7
140
233
40
a) If no one owns the lake and if there are no regulation of pollution, what is the quantity
of pesticides produced per week and what is the marginal cost of pollution borne by
the trout farmer
b) If the trout farm owns the lake, how much pesticides is produced per week and what
does the pesticides producer pay the farmer per tonne
c) If the pesticides producer owns the lake, and if a pollution free lake rents for $100 a
week, how much pesticides is produced per week and how much rent per week does
the farmer pay the pesticides producer for the use of lake
d) Compare the quantities of pesticides in parts b and c and explain the relationship
between them
a) If no one owns the lake and if there are no regulation of pollution, the quantity of pesticides produced per week would be 7 tonnes and the marginal cost of pollution borne by the trout farmer would be 40.
b) If the trout farm owns the lake, the quantity of pesticides produced per week would be 5 tonnes and the pesticides producer would pay the farmer $75 per tonne.
c) If the pesticides producer owns the lake, and if a pollution free lake rents for $100 a week, the quantity of pesticides produced per week would be 4 tonnes and the farmer would pay the pesticides producer $100 per week for the use of the lake.
d) The quantity of pesticides produced in part b is higher than the quantity produced in part c. This is because in part b, the trout farmer is able to capture the external costs of pollution, whereas in part c, the external costs are internalized by the pesticides producer, who charges the farmer for the use of the lake.