LAW AND ECONOMICS
HOMEWORK #1

1. Using the example of the cement company (C) and the laundry (L), explain what outcomes result when the cost of installing filters (for L) is $20,000, the pollution damage from the cement dust is $15,000, and the cost of new precipitator technology (for C) is $10,000. Consider all three rules for assigning property rights.

2. Using the notions of property rights and present values, explain how the following policies would affect the deforestation of the Amazon:

a. Suppose that there are no land taxes and a nature lover X wants to establish a wildlife sanctuary in the Amazon. After careful study X purchases a choice plot of land for $500. This piece of land will yield $100 a year from visitors for 10 years when the interest rate is 10%. Is it worthwhile for X to purchase this land?
(1) Now assume that X must pay a 10% tax on the value of the land every year because it is unimproved. Will X purchase this land now?

(2) Now assume a farmer Y is willing to purchase the land for $350 after figuring that he will be able to earn $100 a year for 5 years when the interest rate is 10%. He knows that his taxes on the value of the land will be reduced to 1% (a 90% reduction). Will farmer Y be willing to purchase and develop this land?

b. Assume a farmer is contemplating the purchase of some farm land in the Amazon rainforest which is very cheap. He knows that he can get $50 a year in crops for five years. If the interest rate is 10% what price will he be willing to pay for this land?

c. Suppose the farmer knows that property rights are not very secure in the Amazon rainforest and that he will really only be able to get $20 a year in crops (the other $30 will be stolen). What price will he offer for the land now?

d. Daniel Benjamin writes that "the absence of secure property rights threatens forests by deterring investments in irrigation, terracing, and soil enrichment." Explain why this leads to the clearing of more land in the Amazon rainforest. (Hint: What happens to agricultural yields?)

e. A rancher is tempted to buy some land and raise some cows on it in the Amazon rainforest. He knows that annual revenues from ranching would be $1,000 a year for 5 years when the interest rate is 10% and that initial setup costs will be $3,000 plus annual costs of $300 for 5 years.

(1) Will this rancher go ahead with this project?

(2) Suppose the government grants the rancher a 75% tax credit on all his costs. (Note: This effectively lowers the rancher's costs by 3/4.) Will he set his ranch up in the Amazon now?

3. Explain why the clearcutting of trees (cutting down all the trees) is a practice often used on public lands but very rarely on private lands. Under what circumstances would clearcutting be a rational strategy?

4. Answer and explain these questions concerning the issue of takings:

a. Is the optimal dollar-value of takings positive or zero?

b. Does your approach to the problem of takings depend on how many public goods there are? (That is, is the number of public goods large, small, or zero?)