What is the cost inflicted on the neighbour

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Reference no: EM132208419

Question: People live right beside the OSP factories constantly complain about the horrible noise generated in the process of training parrots to sing La Traviata. Count Kalippo is very sensitive to these issues and has decided to investigate what to do about it in his small county (Kalippunty). It turns out that in Kalippunty there is only one OSP trainer whose private costs are equal to Cp (q) = 10q + q^2 However, this single OSP trainer is just one of thousands of OSP trainers in the global market that is Nutting Atoll, so he takes prices as given as he sells his parrots in the global market. The current going price for OSP in the competitive market is $70. This trainer has only one neighbour, who suffers a cost Ce (q) = 15 + 4q + q^2 when the trainer trains q OSPs.

a. How many OSP does the trainer in Kalippunty train in a competitive equilibrium? What are his profits?

b. What is the cost inflicted on the neighbour for the quantity produced in the competitive equilibrium?

c. Disregarding consumer surplus (since consumers are not in Kalippunty anyway) what is the total surplus generated by the trainer?

d. In the face of this horrible inefficiency, Kalippo decides to intervene. He first wants to figure out what the social optimum would be. Derive the social cost function for OSPs. What is the social optimum quantity for Kalippunty?

e. He first considers imposing a Pigouvian tax on the producer. What would the tax be? What would the net of tax profits of the trainer be? (Remember, a Pigouvian tax imposes a tax on the producer equal to the externality generated by production at the socially optimal level of production).

f. Alternatively, he ponders a quantity restriction. Because he got his calculations in part d. wrong, he thinks that the social optimum is at XX = 15. If he imposes this quota, what are the profits of the trainer? What are the profits if he imposes the right quota (i.e. the answer to question d.)?

Reference no: EM132208419

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