A chemical factory produces chemical K and an effluent E dumped in a river; a downstream fishery produces fish F, its costs affected by E. Both firms are competitive and face unit prices and . The factory's cost is and the fishery's cost is . If the factory chooses K and E to maximize profit and the fishery chooses F to maximize profit, the chosen levels of chemical, effluent and fish are respectively
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A chemical factory produces chemical K and an effluent E dumped in a river; a downstream fishery produces fish F, its costs affected by E. Both firms are competitive and face unit prices P_K=10 and P_F=20. The factory's cost is C(K,E)=K²[(5-E)²+1] and the fishery's cost is C̃(F,E)=F²E². If the factory chooses K and E to maximize profit and the fishery chooses F to maximize profit, the chosen levels of chemical, effluent and fish (K,E,F) are respectively (A) 5, 0, 5/8 (B) 3, 0, 2/5 (C) 5, 5, 2/5 (D) 5, 5, 5/8
Also written as: A chemical factory produces chemical K and an effluent E dumped in a river; a downstream fishery produces fish F, its costs affected by E. Both firms are competitive and face unit prices P_K=10 and P_F=20. The factory's cost is C(K,E)=K^2[(5-E)^2+1] and the fishery's cost is C_tilde(F,E)=F^2E^2. If the factory chooses K and E to maximize profit and the fishery chooses F to maximize profit, the chosen levels of chemical, effluent and fish (K,E,F) are respectively
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This question is on Externalities and the social optimum, part of Market failure, externalities and public goods in Microeconomics.
Costs or benefits that fall on others, and why the private and socially efficient outputs differ.
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