Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 12

Consider the case of Jolie and Maddox outlined in problem. Suppose that the law states that anyone using manure for fertilizer may not use so much that it bothers his or her neighbors.
a. If you were the benevolent social planner, would you like to see Jolie keep five beds or six? Why?
b. If bargaining between Jolie and Maddox is easy, how many beds will Jolie keep? Describe the bargain that results, if any, including the amount of money changing hands.
c. Is the outcome in (b) an outcome that the benevolent social planner would endorse? Why or why not?
Problem:
Jolie grows asparagus for a living. Her asparagus beds, fertilized with manure, are extraordinarily productive. When Jolie tends five beds, her profits are $3,000. When Jolie expands her operation to six beds, she earns $3,600. Next door, Maddox runs a tea shop. When Jolie tends five beds of asparagus, Maddox's customers can't detect the smell of manure from Jolie's beds, and Maddox earns $1,200. When Jolie tends six beds, the smell of manure is noticeable, and Maddox's profits fall to $800. Explain why it is probably unfair (though convenient) to characterize Jolie as the polluter and Maddox as the victim.