4. Which of these is the most efficient outcome? If prices fluctuate over time between $200 and the cost of the lowest-cost producer, which will be the likely long-run free-market equilibrium? Biological pest control has high fixed costs associated with machinery and predator rearing; farmers experience substantial ‘‘learning by doing’’; and farmers also depend on ‘‘network externalities’’—information gained from fellow farmers and extension agents. Finally, if neighboring farmers are spraying pesticides, the pesticides will also kill off natural predators. Given these factors, assume we can write an average cost function per ton of output for an individual farmer using biological methods that looks like this:

ACb = $200 − 01Xb − 1yb + 0.01Xc where:

Xb = is tons of biological production in the region Xc = is tons of chemical production the region yb = is tons of the farmer’s production