1. A charcoal manufacturer (C) is located next to a fabric manufacturer (F). F produces fabric...

Transcribed Image Text:

1. A charcoal manufacturer (C) is located next to a fabric manufacturer (F). F produces fabric that is used to make white bed sheets, and as part of the process hangs the bleached fabric outside to dry. The smoke that C emits in producing charcoal stains the fabric. Under this situation, the value of production for C is 900, and the value of production for F is 400. It's possible for F to build a larger facility and fans so that it can dry the bleached fabric indoors. This would cost 300, but would generate additional economic surplus (not including the cost of building the larger facility) of 400. More specifically, F earns 800 either when C does not emit smoke or when C emits smoke and F has built the larger facility (800 does not include the cost of building the larger facility). Ignoring the issue of which party bears a cost, what is the socially optimal out- come? That is, what choices maximize the joint payoffs of C and F? 1. A charcoal manufacturer (C) is located next to a fabric manufacturer (F). F produces fabric that is used to make white bed sheets, and as part of the process hangs the bleached fabric outside to dry. The smoke that C emits in producing charcoal stains the fabric. Under this situation, the value of production for C is 900, and the value of production for F is 400. It's possible for F to build a larger facility and fans so that it can dry the bleached fabric indoors. This would cost 300, but would generate additional economic surplus (not including the cost of building the larger facility) of 400. More specifically, F earns 800 either when C does not emit smoke or when C emits smoke and F has built the larger facility (800 does not include the cost of building the larger facility). Ignoring the issue of which party bears a cost, what is the socially optimal out- come? That is, what choices maximize the joint payoffs of C and F?