1. Reconsider the production externality model covered in the lecture and as a tutorial problem. Suppose that AussieSteel and AussieFish merge and, according to the new contract, AussieSteel holds S per cent of the shares and AussieFish holds the remaining (100-S) per cent of the shares. If the profit level is used as the basis of comparison:

a.Both firms cannot be simultaneously better-off after the merger, as the optimal joint profit after merging will be exactly the same as the sum of optimal profits before the merger.

b.Both firms could be potentially better-off, but only after the introduction of a Pigouvian tax.

c.Both firms could be potentially better-off, but only after the introduction of a trading scheme for contamination permits.

d.Both firms could be potentially better-off, but only after the introduction of a Pigouvian tax or a trading scheme for contamination permits.

e.Both firms could be potentially better-off, as the optimal joint profit after merging will be greater than the sum of optimal profits before the merger. Furthermore, under the new agreement no Pigouvian tax or trading scheme for contamination permits would be needed.