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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