2010-Problem-Session-8 - Stanford University Department of...

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Unformatted text preview: Stanford University Department of Management Science and Engineering MS&E 241 Economic Analysis Optional Problem Session 8 Winter 2010 Friday, March 12, 2010 Practice Problem 8.1 (Externalities, Pigouvian Taxes, and the Coase Theorem) Pablo oper- ates a steel mill in Watsonville. His cost function is given by C P ( s,a ) = s 2 + (4- a ) 2 where s represents the quantity of steel produced. As a byproduct of his steel production, there are CO 2 emissions and a (0 a 4) stands for the quantity of polluted air. Laura operates an organic broccoli farm right next to the steel mill. Her cost function is given by C L ( b,a ) = b 2 + ba + a 2 . Therefore her costs are indirectly affected by Pablos steel production via the quantity of polluted air a that he chooses to produce. (i) Compute C P a , and C L a . Comment on the effect of a on the individual costs of Pablo and Laura....
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