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Externalities

Wilbur and Orville are in a dispute. Orville would like to fly his planes while Wilbur does not want to have the value of his house decreased due to the noise. Use the information in the table to help them solve the problem.

# of Flights Total Profits Marginal Profits Value of Wilbur's House
1 $10000 $10000 $100000
2 18000 8000 95000
3 24000 6000 90000
4 28000 4000 85000
5 30000 2000 80000

a. If Orville has the right to fly, what will be the number of flights allowed if Wilbur can negotiate?

b. If Wilbur has the right to peace and quiet, what will the number of flights allowed if Orville can negotiate?

c. What will be the value of Wilbur's house at the socially efficient number of flights? Why?

Solution Preview

a. If Orville has the right to fly, what will be the number of flights allowed if Wilbur can negotiate?

If Orville has the right to fly, there is no external cost in his flight decision. Therefore, he will try to maximize the total profit given no constraints. Then he will find the optimal choice by setting marginal profit close to zero. In the table, we find that the profit is maximized when 5 are flied.
Then the number of flights would be 5, and his profit (max) = 30,000
Also ...

Solution Summary

Externalities are solved.

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