Intermediate Microeconomic problem set section A & B - Coursework Example

It is only possible to have dominant strategy equilibrium as Nash equilibrium, and not Nash equilibrium as dominant strategy. A dominant strategy is a special case of Nash equilibrium since there can be a tie of the strategies made by the players, therefore, resulting in Nash equilibrium. At that point, no player is capable of making any move since any move made by any player makes them worse off. They can only make a move if the dominant player makes a move (Kelly, 2003). 5. What are production externalities and how can they be eliminated through a merger?

Explain, also with the aid of an example illustrated by a diagram. Production externalities are costs or benefits to a party other than the producer. Production externalities can either be positive or negative. Positive production externalities are the benefits that ensue from production or the construction of a production unit in a place. The benefits are to the society. These benefits result from production externalities that come about as a result of production by companies and industries.

The costs that come about as a result of production sum up to negative production externalities. . Industries emit harmful gases into the atmosphere through the various processes of production. Such gases pollute the environment and more so, the air people breathe. This results in respiratory diseases when inhaled and also destroys the ozone layer leading to changes in climate. Setting up of industries also involved creating space trough cutting down of trees. Planting and having such trees takes ages and this is a cost to the society.

Another externality is that traffic jams ensue as industries take up more space for industrial construction. Positive production externalities are the benefits to other third parties other than the producer. Such benefits are enjoyed by third parties. The producer does not enjoy them. An example is where producers provide jobs to the community in which it is set up and provides sponsorships and produce quality and safe products to the society. Have to be charged for emission of gases or harmful substances into the environment.

They also pay for pollution permits in order to produce. Industries also pay taxes to the government which acts as a revenue. While society benefits from this, it is a cost to the producer. A merger is where industries come together and represent both industries as one. For example, when there is a fishing firm a manufacturing industry that emits sewerage to the water that the fish firm depends on. The fish firm may decide to buy the manufacturing firm so it becomes one company, so that it is able to control the pollution of the water resource.

Thus, by merging the two industries, the costs of the production externality are controlled and reduced (Quiggin and Chambers, 2001). S=maginal social costs(MSC) S=marginal private costs (MPC) Price P* P B D=marginal social benefits (MSB) Q* Q Quantity The difference