Consider a firm that causes pollution in a lake affecting a group of individuals. The production cost of the firm is c(q) = cq2/2, where c > 0 and q is the quantity produced by the firm, and the total cost imposed on the individuals (adding the costs suffered by each of them) is (q) = q2/2, where > 0. Suppose that the individuals affected by pollution in the lake own the lake, and that they organize to sell pollution permits, with a price of , so that the firm must pay per unit of output.

1. What is the competitive price of pollution permits?
2. What is the profit maximizing choice of output by the firm if the firm must buy pollution permits and buys them at the competitive price?