Suppose we have an agricultural valley 100km by 50km, with a polluting electrici
ID: 1218351 • Letter: S
Question
Suppose we have an agricultural valley 100km by 50km, with a polluting electricity power plant. The power plant causes pollution problems on a narrow strip of land downwind of the plant, and within this valley 10km in length and 500 m in width, but no problem outside that area. The total effect of pollution is to make crop land less productive. If we were to clean up the pollution, would we expect land prices to increase? Where? Would we expect wages to decline? Would the changes inland prices and/or wages filly reflect the benefits pf cleaning up pollution? Why or why not
Explanation / Answer
If the pollution is to be cleaned up, it would reduce the negative externality of making the land less productive. As a result of this the land is now more productive and thus the land price would increase. It would increase only in the area which is affected by the pollution activity,i.e, valley within 10 kmin length and 500m in width. Rest of the land is not affected by the pollution.
At the same time the tax is being collected from the employer and is thus recovered from the worker's wages inorder to take up the pollution clearing activity. Thus the overall wages of the workers would decline.
Changes in land price and wages are fully reflective of the pollution clearing activity as the land price rises only after the pollution clearing activity is being undertaken.