# Working out welfar gains and losses from graph

• Oct 27th 2009, 03:28 PM
eichstaettisaurus
Working out welfar gains and losses from graph
Hi.

I'm terrible at maths and have never done economics till now, so sorry if it's easy but I'm very stuck with a question

It involves a question about a graph of Marginal Emissions Cost to fishermen and Marginal (pollution) Abatement Cost to a paper factory (which is polluting a lake), with the two crossing over like a supply and demand curve respectively:

The idea is that whichever has the property rights, has to pay the other one compensation, with either in theory giving the same net social benefit.

The PDF of the question (question 2) is attached.

One has to fill into a table the welfare (in terms of letters) for the paper factory, the fishermen, and society before trading (i.e. compensating), after trading, and also "E/A" which I don't really understand:

My 'teacher' (who is totally incompetent!) gave us the answers in class in theory, but I couldn't understand where they were coming from at all. Thus ANY clarification of why each table is as it is would be fantastically appreciated..

With the paper company having the property rights, the table is like this apparently:

Paper company
Welfare before trade: 0
Effects E/A: -C
Effects of payment: +D+E
Sum after trade: +E
Difference: +E

Fishermen
Welfare before trade: CDEF
Effects E/A: -C
Effects of payment: -D-E
Sum after trade: -C-D-E
Difference: +F

Society
Welfare before trade: CDEF
Effects E/A: -C-D
Effects of payment: 0
Sum after trade: -C-D
Difference: +E+F

With the fishermen having the rights, it's like this:

Paper company
Welfare before trade: A+B+C+D
Effects E/A: -D
Effects of payment: -B-C
Sum after trade: -B-C-D
Difference: +A

Fishermen
Welfare before trade: 0
Effects E/A: -C
Effects of payment: +B+C
Sum after trade: +B
Difference: +B

Society
Welfare before trade: A+B+C+D
Effects E/A: -C-D
Effects of payment: 0
Sum after trade: -C-D
Difference: +A+B

Thanks very much indeed for any help you can give, and best of wishes.