Question

2. Two firms, called Polluter 1 and Polluter 2, produce good A. The production of A adversely affects the profits of a third firm, called Victim, which produces the good V. The profits of the three firms are as follows, where π| denotes Polluter 1's profits T2 Polluter 2's, and πυ Victims. where c0 and A - AA2. Suppose the government recognises that the Polluters' production of A imposes a negative externality on Victim, and to try to remedy this, mandates that Victim can charge the Polluters a price of P for every unit of A that they produce. Once this compensation scheme is in place, the government observes a total of A 4 being produced. Find c, and the Ai and A2 that are produced under the compensation scheme. (Assume all three firms are price-takers (i.e. they take P as given)).

Answer 1

Now vich m ggf. CA2+ AF.thus TA_ Poc: A2 as AitA2-4, thus 4 OA QA