2. Externality. The table below lists the expected daily benefits between a resident that owns a tree and a neighbor who receives benefits from the neighbor's tree in terms of a providing a green canopy, a view, and sheltering wildlife. The owner of the tree receives benefits from having the tree on his yard but must also bear the costs of watering and maintaining the tree. The question is who owns the right to decide if the tree should be cut down or not. Assume both parties can negotiate at zero cost Homeowner Neighbor Tree Stays $25 $35

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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2. Externality. The table below lists the expected daily benefits between a resident
that owns a tree and a neighbor who receives benefits from the neighbor's tree in
terms of a providing a green canopy, a view, and sheltering wildlife. The owner
of the tree receives benefits from having the tree on his yard but must also bear
the costs of watering and maintaining the tree. The question is who owns the
right to decide if the tree should be cut down or not. Assume both parties can
negotiate at zero cost
Homeowner Neighbor
Tree Stays
$25
$35
Tree is Cut Down
$40
$30
a. Based on total benefits should the tree survive or be cut down? Explain?
b. If the Homeowner were assigned the right to decide the fate of the tree, what
would happen to the tree? Explain.
c. If the Neighbor were assigned the right to decide the fate of the tree, what
would happen to the tree? Explain. Could the Homeowner negotiate with the
Neighbor for a different solution? Explain
Transcribed Image Text:2. Externality. The table below lists the expected daily benefits between a resident that owns a tree and a neighbor who receives benefits from the neighbor's tree in terms of a providing a green canopy, a view, and sheltering wildlife. The owner of the tree receives benefits from having the tree on his yard but must also bear the costs of watering and maintaining the tree. The question is who owns the right to decide if the tree should be cut down or not. Assume both parties can negotiate at zero cost Homeowner Neighbor Tree Stays $25 $35 Tree is Cut Down $40 $30 a. Based on total benefits should the tree survive or be cut down? Explain? b. If the Homeowner were assigned the right to decide the fate of the tree, what would happen to the tree? Explain. c. If the Neighbor were assigned the right to decide the fate of the tree, what would happen to the tree? Explain. Could the Homeowner negotiate with the Neighbor for a different solution? Explain
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