production externality

Question 1

Cost function of steel firm
Cost function of fishery

Answer 1

CS (s,x)
CF(f,x)

Question 2

Assumption

Answer 2

Firms behave competitively. No price making power, take prices as given. Ps and Pf.
CSx(s,x) = 0 when x is sufficiently large

Question 3

No tradeable property rights

Answer 3

Inefficient outcome. SMC of waste > 0
SMB of waste = 0

Question 4

consequence of externality

Answer 4

discrepancy between the private and social costs and benefits

Question 5

How to get rid of externality

Answer 5

Internalise externality - merger. This forces the steel firm to consider the social costs of its actions.
Pigouvian tax - set equal to SMC
Tradable property right

Question 6

what does firm equate

Answer 6

Firm equate private marginal costs of its actions to private marginal benefits which in the merged firm equates SMC=SMB

Question 7

market signal

Answer 7

market signals the internalisation of production externalities through the profit motive. Exploit synergy…

Question 8

distribution of rights

Answer 8

Doesn’t matter in terms of reaching the pareto efficient outcome. Does however impact profits