7. The economy has two firms. Firm 1 produces an output x that it sells in a competitive market and firm 2 produces an output y that it sells in a competitive market as well. However, the production of x imposes a cost e(x) Firm l’s cost function of producing x is given by 5, and the cost function for firm 2 = x on firm 2. to produce output y is 5. 7.1 Illustrate how Pigou would solve this externality problem. 7.2 Illustrate how the competitive market based on different ways of defining and assigning property rights in this context would solve this externality problem.

7. The economy has two firms. Firm 1 produces an output x that it sells in a competitive market and firm 2 produces an output y that it sells in a competitive market as well. However, the production of x imposes a cost e(x) Firm l’s cost function of producing x is given by 5, and the cost function for firm 2 = x on firm 2. to produce output y is 5. 7.1 Illustrate how Pigou would solve this externality problem. 7.2 Illustrate how the competitive market based on different ways of defining and assigning property rights in this context would solve this externality problem.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Any reference to the presence of "an externality in a market" is associated with principle # Principle #1: People (Including Individuals and Society As a Whole) Face Tradeoffs Principle #2: The Cost of Something is What You Give Up to Get It Principle #3: Rational People Think at the Margin Principle #4: People Respond to Incentives Principle #5: Trade Can Make Everyone Better Off Principle #6: Markets Are Usually A Good Way to Organize Economic Activity Principle #7: Governments Can Sometimes Improve Market Outcomes Principle #8: A country's standard of living depends on its ability to produce goods and services. Principle #9: Prices rise when the government prints too much money. O Principle #10: Society faces a short-run tradeoff between inflation and unemployment.
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