Suppose U.S. Steel has a steel factory on the Monongahela River in Southwestern PA. Suppose further that steel is sold in a competitive market at a price of $5 per unit. The private marginal cost of steel production is MC(s) = 2 + 0.5s. The factory produces water pollution that causes economic damages to the Monongahela River Kayak Association (MRKA). These damages can be represented by the function MEC(s) = 2.
A) What is the producer surplus in market equilibrium? What is the external surplus?
B) Suppose the MRKA successfully petitioned for the right to clean water on the river, and U.S. Steel is liable for damages in court. What would be steel output given the property rights regime if U.S. Steel wants to maximize their own surplus? Calculate producer surplus, external surplus, and deadweight loss under this level of output.
Suppose U.S. Steel has a steel factory on the Monongahela River in Southwestern PA. Suppose further that steel is sold in a competitive market at a price of $5 per unit. The private marginal cost of steel production is MC(s) = 2 + 0.5s. The factory produces water pollution that causes economic damages to the Monongahela River Kayak Association (MRKA). These damages can be represented by the function MEC(s) = 2.
A) What is the producer surplus in market equilibrium? What is the external surplus?
B) Suppose the MRKA successfully petitioned for the right to clean water on the river, and U.S. Steel is liable for damages in court. What would be steel output given the property rights regime if U.S. Steel wants to maximize their own surplus? Calculate producer surplus, external surplus, and deadweight loss under this level of output.
