Question

Two jurisdictions, the Low Country and the Highlands, produce warming emissions that are increasing flood risks. Each can mandate a technology that will eliminate emissions at a cost of $50 billion. For each place that installs the technology, Low Country receives $60 billion in benefits and Highlands receives $20 billion in benefits.

What is the socially optimal outcome?

		The Low Country and the Highlands do not mandate the technology.
		The Highlands mandates the technology but the Low Country does not.
		The Highlands does not mandate the technology but the Low Country does.
		Both countries mandate the emissions control technology.

Answer 1

ANS

Option C. The Highlands does not mandate the technology but the Low Country does. This should be done as warming would create the risk of floods and for Highlands getting emmmisions control technolgy will be cost incurring as their return is lower but we are asked for socially optimum outcome which is the outcome where there is an intersection of social benefit and the social cost. So in option C marginal social benefit is 10 billion when it is adjusted with the marginal social cost but if both of them have the technology then there is a marginal social loss of $20 billion . So option C is correct.