(A) Suppose that the two firms merge. Write down the profit function of the merged firm. Calculate the profit maximizing level of output, the amount of pollution for the merged firm, and its profit. Is the merger Pareto improvement? Why or why not? (B) Suppose that the merger is forbidden by the government. Instead, now
(A) Suppose that the two firms merge. Write down the profit function of the merged firm. Calculate the profit maximizing level of output, the amount of pollution for the merged firm, and its profit. Is the merger Pareto improvement? Why or why not?
(B) Suppose that the merger is forbidden by the government. Instead, now the fishery has the property right to water. In other words, anybody who wants to pollute the water needs to buy a pollution right from the fishery. Let the price of the pollution right be Px. Write down the steel mill’s new profit function and the fishery’s new profit function.
(C) Calculate the profit maximizing level of output for each firm, the amount of pollution, and the price of pollution right.
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