assuming that the chemical firm has the legal right to dump effluent into the lake, we can analyze the economic implications of this situation.
Given that each ton of chemical output causes a 20-pound reduction in the annual catch of the fishing firm, we can calculate the cost incurred by the fishing firm due to the pollution caused by the chemical producer.
Let's assume the fishing firm's annual catch without any pollution is C0. With the pollution caused by the chemical producer, the fishing firm's annual catch would be reduced by 20 pounds for each ton of chemical output. Let's denote the chemical output as Q (in tons).
The total reduction in the fishing firm's annual catch, denoted as ΔC, can be calculated as follows:
ΔC = 20 * Q
To determine the economic cost incurred by the fishing firm, we need to multiply the reduction in catch by the market price of fish. Given that the current competitive market price of fish is $3 per pound, the cost (C) incurred by the fishing firm due to pollution can be calculated as:
C = 3 * ΔC
C = 3 * (20 * Q)
C = 60Q
Therefore, the economic cost incurred by the fishing firm due to the pollution caused by the chemical producer is 60 times the quantity of chemical output (Q) in dollars.
It's important to note that this analysis assumes zero transaction costs and that the chemical firm has the legal right to dump effluent into the lake. However, it's worth considering the potential environmental and social externalities associated with such pollution, which may have broader impacts beyond the direct economic cost to the fishing firm.
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