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Surplus Distribution when Fishermen Pay the Maximum Offer
If the fishing industry pays its maximum possible offer—an amount equal to the total gain it receives from reduced pollution—then the banana plantations capture the entire net social gain from the agreement. In this scenario, the fishermen are no better or worse off than they were without the deal, while the plantations receive all the benefits of the cooperation.
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Introduction to Microeconomics Course
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CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
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Surplus Distribution when Fishermen Pay the Maximum Offer
A chemical factory's discharge into a river imposes costs on a downstream bottling plant that requires clean water. Through negotiation, the two parties determine that reducing the factory's output to the socially optimal level would result in two main financial changes: the bottling plant's profits would increase by $150,000 annually due to cleaner water, and the chemical factory's profits would decrease by $90,000 annually from the reduced output. Based on this information, what is the maximum amount the bottling plant would be willing to pay the chemical factory as an annual payment to convince it to reduce its output?
Bargaining over a Negative Externality
A leather tannery's operations pollute a river, increasing costs for a downstream brewery. If the tannery reduces its output to the socially optimal level, the brewery's profits will increase by $50,000, and the tannery's profits will decrease by $30,000. True or False: The maximum amount the brewery would be willing to pay the tannery to make this change is $20,000.
Calculating Maximum Willingness to Pay
A large-scale server farm's high energy consumption causes power fluctuations, disrupting the operations of a neighboring precision manufacturing plant. If the server farm agrees to reduce its peak energy usage to a socially optimal level, the manufacturing plant's annual profit would increase by $200,000, while the server farm's annual profit would decrease by $120,000. Match each economic concept from the negotiation with its correct monetary value based on this scenario.
Determining the Maximum Negotiating Position
A paper mill's effluent pollutes a nearby lake, harming the business of a commercial fishery. If the mill installs a new filtration system to reach the socially optimal level of production, the fishery's annual profits would increase by $80,000. The cost of this change to the paper mill (in terms of lost profit from reduced output and equipment maintenance) would be $55,000 per year. In a private negotiation, the absolute maximum amount the fishery would be willing to offer the mill as an annual payment to make this change is $____.
A commercial fishery is harmed by pollution from an upstream factory. The two parties are considering a private negotiation where the fishery would pay the factory to reduce its output to a more efficient level. To determine the fishery's maximum possible offer and the overall feasibility of a deal, what is the correct logical sequence for the following actions?
Feasibility of a Private Bargaining Agreement
The diagram below illustrates the marginal costs and benefits for a good whose production creates a negative externality. Qm represents the unregulated market output level, and Q* represents the socially optimal output level. The areas X, Y, and Z represent distinct regions on the graph. Which single area represents the maximum total payment that those negatively affected by the externality would be willing to make to the producers to convince them to reduce their output from Qm to Q*?
Learn After
A group of fishermen and a nearby banana plantation are negotiating a deal to reduce water pollution. Without a deal, the plantation earns $500,000 in profit, and the fishermen earn $200,000. If the plantation reduces its output, its profit falls to $400,000, but the cleaner water increases the fishermen's profit to $350,000. The fishermen agree to pay the plantation their maximum possible offer to convince them to reduce output. What is the final profit for each party after this payment is made?
Evaluating Surplus Distribution in a Negotiation
Consider a negotiation where a group of fishermen offers to pay a nearby factory to reduce its water pollution. If the fishermen agree to pay their maximum possible offer—an amount exactly equal to the total financial benefit they would receive from the cleaner water—then the resulting agreement can be described as Pareto efficient.
Analyzing Surplus Distribution in a Negotiation
Explaining the Outcome of a Negotiation
A chemical factory's operations pollute a river, harming a downstream fishery. The parties are negotiating a deal for the factory to reduce its pollution.
- Without a deal, the factory's profit is $1,000 and the fishery's profit is $500.
- If an agreement is reached, the factory reduces pollution, causing its profit to fall to $800. The cleaner water increases the fishery's profit to $850.
- The total net social gain from this agreement is $150.
Match each potential payment amount from the fishery to the factory with the correct description of how the net social gain is distributed.
A winery's use of a specific pesticide harms a neighboring organic farm, reducing the farm's profit by $50,000. The winery could switch to a different pesticide, which would reduce its own profits by $20,000. The total net social gain from the winery switching pesticides is $30,000. If the organic farm pays the winery its maximum possible offer to convince it to switch, how is the $30,000 net social gain distributed?
A downstream fishery's profits are harmed by an upstream factory's pollution. Without any agreement, the factory earns $10,000 and the fishery earns $20,000. If the factory installs a filter, its profits fall to $8,000, but the fishery's profits rise to $25,000 due to cleaner water. To incentivize the factory, the fishery agrees to pay the factory its maximum possible offer. After the payment is made, the fishery's net gain from the agreement is $____.
Analyzing Surplus Distribution in a Cooperative Agreement
An apple orchard's use of a certain pesticide negatively affects a neighboring beekeeper. The two parties are considering an agreement where the orchard stops using the pesticide.
- Without an agreement, the orchard's profit is $100,000 and the beekeeper's profit is $40,000.
- If the orchard stops using the pesticide, its profit will fall to $85,000, while the beekeeper's profit will rise to $70,000.
Which of the following payment arrangements from the beekeeper to the orchard would result in the orchard capturing the entire net social gain from the agreement?