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External effects Consider a chemical factory ("company') and the inhabitants of a neighbouring village ('residents'). The company produces with the production function y = 20x - 7", where y is the

 External effects Consider a chemical factory ("company') and the inhabitants of a neighbouring village ('residents'). The company produces with the production function y = 20x - 7", where y is the output quantity and the input quantity. The company can sell its product at a price of 2 euro per unit and must pay the price of P, for one unit input. The company's production generates waste gases with aggregate 'disutility' (i.e. damage) for the residents depending on the input factor used by the company. Dyresidents = x2 1. What input quantity does the company choose if air pollution is not monitored or penalised and negotiations between the company and the residents are not possible? 2. Calculate the input quantity which the social planner would use. 3. Illustrate your results from sub-problems 1) and 2) in a suitable graphic. Assume in your drawing that px = 20. Explain why a welfare loss occurs in the situation described in sub-problem 1) and calculate the welfare loss (for variable pa).

Exercise 2: External effects Consider a chemical factory (company) and the inhabitants of a neighbouring village (resident

Jun 05 2021 View more View Less

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