Consider a conflict between a factory and a laundry whose business is damaged by pollution from the factory. The marginal profits of the factory vary with its output Q according to the equation MPF = 90 – 1/2 Q. If the factory produced no output, the profits of the laundry would be $5000, but they are reduced to the extent of any pollution damage caused by the factory. The marginal damages to the laundry are determined by the equation MDL = Q. What is the socially optimal level of output of the factory?

Consider whether it is best (1) for the factory to shut down, (2) for the laundry to shut down, or (3) for both factory and laundry to stay in business. This will require some calculations; begin by drawing a diagram.