Summary 495The following articles are classic treatments concerning the difficulties of regulation and the remedies provided
by private negotiation.
Coase, R. R. “The Problem of Social Cost.” Journal of Law and Economics(October 1960): 1–44.
Stigler, G. J. “The Theory of Economic Regulation.” Bell Journal of Economics(Spring 1971): 3–21.
The following references survey the state of environmental regulation.
Nordhaus, W. D., and J. Boyer.Warming the World: Economic Models of Global Warming. Cambridge,
MA: MIT Press, 2000.
“Stern Review on the Economics of Climate Change.” Journal of Economic Literature(September
2007), reviewed by W. Nordhaus (pp. 686–702) and M. Weitzman (pp. 703–724).
The following references provide fine treatments and several case studies of benefit-cost analysis.
Gramlich, E. M. A Guide to Benefit-Cost Analysis.New York: Waveland Press, 2000.
Dorfman, R. “Why Benefit-Cost Analysis Is Widely Disregarded and What to Do about It.’’ Interfaces
(September–October 1996): 1–6.
The following article discusses how to value lives.
Viscusi, W. K. “How to Value a Life.” Journal of Economics and Finance(October 2008): 311–323.
Comprehensive online guides to antitrust policy include: http://www.ftc.gov/bc/antitrust/index.shtm,
and http://www.antitrustinstitute.org/content/antitrust-primers.
For the economic merits of energy and carbon taxes, see:
http://www.globalpolicy.org/social-and-economic-policy/global-taxes-1-79/energy-taxes.htmlCHECK STATION
ANSWERS- Under competition, PcAC 8 and Qc6. Under monopoly, MR MC.
Therefore, MR 20 4Q 8, so Qm3 and Pm14. The deadweight
loss is (1/2)(PmPc)(QmQc) 9. - Who gains and who loses from instituting the pollution tax? Chemical
suppliers continue to earn zero profits. The government collects ($1)(8)
$8 million. Pollution is reduced from 10 million to 8 million units for a
social benefit of $2 million. Consumers suffer from the increase from P
$4 to P $5. Their loss in consumer surplus is given by the trapezoidal
area between these price lines and under the demand curve. This area is
computed as ($1)(8 10)/2 $9 million. Thus, the total net benefit is
8 2 9 $1 million. - At a $2 toll with 5 million trips, the bridge generates $10 million in
revenue and creates $5 million in consumer surplus. After subtracting the
maintenance cost, the bridge’s annual total net benefit is $10 million, so
its net present value is 10/.04 85 $165 million. By limiting traffic, the
toll sacrifices consumer surplus. As a result, the bridge is not worth
building with this pricing policy; its net benefits are lower than the status
quo, the ferry. - The best the firm can do is price the ferry out of the market by charging
P $1 (or a penny below). At this price, demand is 7.5 million trips, so
the firm’s annual profit (net of maintenance) is $2.5 million. The net
present value of profit is 2.5/.04 85 $22.5 million. Building the
bridge is a losing proposition for a private firm.
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