A single entity has property rights over a lake. It operates a commercial fishery there. Another company would like to build a new hydro power plant beside the lake, using the water. The power plant would have total costs of TC=q² + 20q + 700 where q is the power plant's annual electricity generation. Electricity is expected to be sold at a constant price of $100. If the power plant were built, the fishery would suffer damages of $16 per unit of electricity generation. 1. Assuming that the power plant is constructed, how much electricity would it generate if it could act independently of the fishery? What would be the total external damage to the fishery? 2. What is the socially-efficient level of electricity generation? 3. In the absence of transaction costs, what outcome do you expect will arise from bargaining between the fishery and the power plant? Give an example of the bargain they may make (if any).

A single entity has property rights over a lake. It operates a commercial fishery there. Another company would like to build a new hydro power plant beside the lake, using the water. The power plant would have total costs of TC=q² + 20q + 700 where q is the power plant's annual electricity generation. Electricity is expected to be sold at a constant price of $100. If the power plant were built, the fishery would suffer damages of $16 per unit of electricity generation. 1. Assuming that the power plant is constructed, how much electricity would it generate if it could act independently of the fishery? What would be the total external damage to the fishery? 2. What is the socially-efficient level of electricity generation? 3. In the absence of transaction costs, what outcome do you expect will arise from bargaining between the fishery and the power plant? Give an example of the bargain they may make (if any).

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter2: The One Lesson Of Business

Section: Chapter Questions

Problem 2.1IP

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Is it possible to also get the graph for this problem?
Please explain..
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