Firm S produces steel with a cost function Cs(s,x)
Firm S produces steel with a cost function Cs(s,x) = s^2 + 10?(12x?x^2), where s is units of steel and x is units of a pollutant that is a byproduct of steel production. Another ?rm F produces ?sh with a cost function Cf(f,x) = 3f^2 +fx, where f is units of ?sh. Hence, pollution raises F's costs. Steel and ?sh are sold in internationally competitive markets, where the price of steel is $20 and the price of ?sh is $72.
a) Sketch S's marginal bene?t curve (or negative marginal cost) from pollution and F's marginal cost curve from pollution
b) Suppose S can freely dump its pollution into the lake used by F. What will be the quantity of pollution, x?, in the unregulated competitive equilibrium? How much ?sh and how much steel will be produced in this equilibrium?
c) What is the socially e?cient quantity of pollution, x???
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Rating:
5/
Solution: Firm S produces steel with a cost function Cs(s,x)