1.

A large industrial farm pulling water from a lake surrounded by homes using the lake for
recreation.

Answer:

 An externality exits: An accident during the water pulling from lake imposes a negative
externality on people lives nearby, though recreation of lake may also lead to positive
externality.

 If water pulling only damages the property of nearby people, then the property owners can
costlessly recoup the cost in the legal system. Hence, the Coase theorem may apply. In positive
externality case, it is easy to assign the property rights to a recreation lake, so Coase theorem
may apply.

2. A group of protestors marching on Washington D.C

Answer:

 An externality exist: It creates a negative externality on people and environment.

 Coase theorem is not likely be applicable here, because it required property right to those
that are harmed, and the feasibility of negotiated private contracts is difficult to take place.

 Limit the number of people participate in the protest would solve this problem. Hence,
quantity regulation is a suboptimal solution.

3. A timber company clearcutting on indigenous peoples’ land

Answer:

 An externality exist: It creates a negative externality on indigenous people and environment,

though putting wood in building materials may also lead to positive externality.

 Coase theorem is applicable here, because it is property rights is easily defined here. In case
of negative externality, the indigenous people costlessly recoup the cost. In case of positive
externality, timber company is able to negotiate to internalize the benefit.