Question

A factory produces steel which sells for a price (P) of $300 per ton. The factory discharges waste products into a neighboring river during the production process. The steel factory’s marginal cost (MC) curve is given by MC = 100 + 0.5Q where Q is the quantity of steel produced measured in tons. As a result of the waste discharge, the river is polluted, making it more difficult for a nearby fishing/boating resort to attract customers. The marginal external cost (MEC) to the resort is $100 per ton of steel produced. [Hint: See slides 7-16 of the lecture Common Pool Resources, part 1.] Suppose the courts assign to the steel factory the property right to the river. What is the maximum amount the resort would be willing to pay the steel factory to get it to reduce its production level to the statically efficient quantity? What is the minimum bribe the steel plant would be willing to accept? [Hint: See slide 15 of the lecture Common Pool Resources, part 1.] Maximum resort would be willing to pay steel factory = $ ?????

Answer 1