Northern Charcoal Inc. operates a large scale charcoal mill. There is large residential apartment complex downwind and it turns out that the production of charcoal leads to the emission of foul odors. As charcoal production increases, the marginal damage done to the apartment complexes’ property values increases. Society in this area is composed of Northern Charcoal and Windy Pines Place Apartments. The information below shows the costs and benefits to Northern Charcoal of producing charcoal and the external damage done to Windy Pines Place Apartments. There are no positive externalities from charcoal production. (32 points) Determine the socially optimal amount of charcoal. Explain your answer. (32 points) Suppose that there are extremely high negotiations costs between Northern Charcoal Inc. and Windy Pines Place Apartments and that Northern Charcoal has the right to pollute. Northern Charcoal focuses on maximizing its own net benefit. How many tons of charcoal do you anticipate will be produced? Explain. (32 points) If there were zero negotiations costs and Windy Pines Place Apartments had the right to stop all pollutions, is it possible that Northern Charcoalcould end up producing the socially optimal amount of charcoal? If not, explain why not? If so, explain the process that would lead to the socially optimal amount. Be specific using the information in the tables. (24 points) Say there were high negotiations costs and Northern Charcoal had the right to pollute. If you were trying to choose a per-unit tax per ton of charcoal that would get Northern Charcoal to choose the socially optimal production of charcoal, what would it be and why? Remember that a per-unit tax means that the tax per ton of charcoal is the same amount for every ton produced.
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