Question

Mildred and Craig are neighbors in Ft. Lauderdale Florida. They each own a two-story building. Mildred has a greenhouse on top of her building – in this greenhouse, she grows organic peppers which she sells at the local farmers’ market every Saturday. Each organic pepper cost her $.50 to grow. Every Sunday, at the farmers’ market, Mildred can expect to sell 100 peppers at $2 a piece. Yesterday, Mildred received a notice from the city of Ft. Lauderdale informing her that construction was about to begin on Craig’s building – Craig had received a permit from the city which allowed him to add a third story onto his building. After upkeep and maintenance expenses of $50 a week, Craig expects to rent out the third story for $100 a week. Mildred is upset at the prospect of Craig adding a third story to his building because the third story will block the sunlight which her peppers need to grow. Without sunlight, Mildred expects that on average each pepper will still cost her $.50 to grow; however, the number of peppers she can sell at the farmers’ market for $2 will fall to 40.

A. How can the externality be internalized? (NOTE: I want a detailed analysis of each economic actor’s choice calculus. And, think in terms of a weekly payment.)

Answer 1