Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Externalities. Consider a firm that causes pollution in a lake affecting a group of individuals. The production cost of the firm is c(q) =

 

Externalities. 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) = pq2/2, where p > 0. (a) Suppose initially that the firm cannot bargain, trade, or otherwise compensate the individuals. Calculate the profit maximizing choice of output by the firm, the revenue of the firm, the private cost of the firm, the externality that the firm imposes over the individuals, and the total social cost. (b) Suppose now that the individuals affected by pollution in the lake own the lake, and that they organize to sell pollution permits, with a price of p, so that the firm must pay p per unit of output. Find the competitive price of pollution permits, as well as the profit max- imizing choice of output by the firm if the firm must buy pollution permits and buys them at the competitive price.

Step by Step Solution

3.52 Rating (165 Votes )

There are 3 Steps involved in it

Step: 1

a In the absence of bargaining or compensation the firm only considers its own private costs and benefits without accounting for the external costs im... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Econometric Analysis

Authors: William H. Greene

5th Edition

130661899, 978-0130661890

More Books

Students also viewed these Economics questions

Question

Name the intersection of PR and HR. E P H R F G S

Answered: 1 week ago