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QUESTION 4 A single entity has property rights over a lake. It operates a commercial fishery there. Another company would like to build a new power plant beside the lake, using the water. The power plant would have total costs of TC = q2 + 20q + 700 where q is the power plant's annual electricity generation. Electricity is expected to be sold at a constant price of $100. If the power plant were built, the fishery would suffer damages from the heated water, of $16 per unit of electricity generation. 1. How much electricity would the power plant generate if it could act independently of the fishery? What would be the total external damage to the fishery in this case? 2. What is the socially-efficient level of electricity generation? 3. In the absence of transaction costs, what outcome do you expect will arise from bargaining between the fishery and the power plant? 4. Suppose the parties need to pay for a third independent firm to monitor the level of electricity generation. What is the maximum that they would be willing to pay for this? Show Transcribed Text