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Increasing marginal cost of production function

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Reference no: EM133084009

A paper firm, PF, produces 20 tons of water pollution for every 100 tons of paper it produces. The downstream village of Watertown (WT) spends $160 per ton of water pollution from PF to eliminate its environmental harm.

PF is a price taker in an international market where the demand for paper is p = 100 - 4X and the market supply of paper is p = 60 + 4X.

X is in units of one (1) million tons and p is the price in dollars per ton of paper.

PF has a daily increasing marginal cost of production function, MC = x. PF's Total Cost function = x*x/2 where x is PF's daily output.

(a) If PF has no legal liability for its pollution, what is PF's daily production of paper? How does your answer here relate to the concept of private efficiency?

(b) Assuming PF is still not legally liable for its pollution and both PF and WT do not use lawyers, would there be an agreement? How does your answer here relate the concept of private efficiency to social efficiency? Fully explain your answer.

(c) Suppose the rule of strict liability is imposed on PF. Assuming no transaction costs, how will bargaining proceed?

(d) Fully explain how high transaction costs for PF can change your answers (b) and (c)?

Reference no: EM133084009

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