21.9 Business Application: Pollution that Increases Firm Costs—The Market Outcome: In the text, we assumed for convenience that the ill effects of pollution are felt by people other than producers and consumers. Consider instead the following case: An entire competitive industry is located around a single lake that contains some vital property needed for the production of x. Each unit of output x that is produced results in pollution that goes into the lake. The only effect of the pollution is that it introduces a chemical into the lake, a chemical that requires firms to reinforce their pipes to keep them from corroding. The chemical is otherwise harmless to the population as well as to all wildlife in the area.

A. We have now constructed an example in which the only impact of pollution is on the firms that are creating the pollution. Suppose that each unit of x that is produced raises every firm’s (recurring)

fixed cost by d.