Need help wit A-I

Externalities 5. There is a steel plant and a fishery both located near a river. The steel plant produces steel and, in the process, generates some pollution, which harms the fish in the river. The polluted water makes it difficult to harvest fish, so that the fishery has to incur extra costs of cleaning up the river. Both the steel plant and the fishery operate in perfectly competitive markets for their respective products. Let s denote the production level of steel; ps be the market price of steel. f is the amount of fish harvested and p/ is the price of fish. The market price and marginal costs of production for each firm is given below: ps = $8, C (s) = $2, MCS = 2s; pf = $10, C (f ) = f2 + sf, MCf = 2f+s. a) What is the Marginal Social Cost of steel? What is the Marginal External Cost of Steel? Page 3 of 5 b) Derive the market equilibrium production of steel, s* and the steel plant's profits, TT S* c) Derive the market equilibrium production of fish, f* and the fishery's profits, if*. d) What is the efficient level of production of steel and fish? Denote these by s and fe respectively. e) What are the joint profits of the steel plant and fishery at the efficient outcome? How is it different from the total profits in the market equilibrium, IS* + If*? f) Suppose the property rights to the river are assigned to the steel plant so that it has the "right to pollute". Explain how the pollution externality can be traded between the fishery and the steel plant to achieve the efficient outcome. g) What are the final profits to each firm after the externality has been traded? h) Suppose instead that the property rights to the river were assigned to the fishery. Redo parts f) and g). i) In the absence of property rights, how can a pollution tax be used instead to achieve the efficient outcome