A regional airport decides to extend a runway, increasing the ...

[Brittanyd9008]

A regional airport decides to extend a runway, increasing the amount of noise pollution on nearby homes. Assume that an optimal corrective tax can be applied.
 
  Should that tax be paid as compensation to the nearby homeowners? How might compensating the homeowners change their (and potentially others) incentives?

Question 2

Firm A is a monopoly. The demand for its output is p = 90 - Q. Production is such that Q = L. Firm A hires labor in a competitive market where the wage is 10. Firm A will hire
 
  A) 10 units of labor.
  B) 20 units of labor.
  C) 30 units of labor.
  D) 40 units of labor.

[l.stuut]

Answer to Question 1

The key to this question is the reciprocal nature of the problem. If residential housing was not located near the airport, then the noise pollution would not be a problem. On the other hand, if the airport had not extended its runaway, then the noise pollution would not have been such a problem. Efficiency requires that both parties have an incentive to avoid the problem. The corrective tax should correct the incentives of the airport. Paying the revenues collected from the airport as compensation to the homeowners, however, would decrease the incentives homeowners would have to avoid the current problem as well as future problems.

Answer to Question 2

D

[Brittanyd9008]

Excellent

[kthug]

TYSM