Consider a railroad is next to a farm.Each time the train passes by the farm,spa
ID: 1254019 • Letter: C
Question
Consider a railroad is next to a farm.Each time the train passes by the farm,sparks from the train fly into the farm and destroy some of the crop.The following gives the marginal cost of the train that pass the farm on one month.#of train marginal cost of the train crop damage social marginal cost
3 400 1000
4 1000 1000
5 1800 1000
6 2200 1000
7 2800 1000
8 3400 1000
a) what is the social marginal cost?If each train load can be sold for $2800, what is the socially optima number of trains that should pass the farm each month?
b)Given that property rights are clearly defined and negotiation is countless, how could we arrive at the socially optimal decision without government intervention?
Explanation / Answer
a) Social marginal cost is the cost to the society (in this case the cost of the destructed crop) caused by some activity (in this case train passing through the farm) For an Optimum number of trains that should pass... Marginal cost = Marginal income checking in the table for.... Marginal cost = 2800 (1800 + 1000) we get Optimum No. of trains = 5 b) We could arrive at socially optimal decision can be reached here if proper fines are charged to the railroad for destruction of the property in the property rights. or if the charge is being levied on the railroad by the property owner.