Two companies in the same town must decide whether to pollute. Choosing to pollute means the company will increase revenue, but they will also face higher medical costs because workers get sick more frequently.
• If company A pollutes and B does not, then company A increases revenue by $60 million, but incurs additional medical costs of $45 million and company B incurs additional medical costs of $45 million.
• If company B pollutes and A does not, the company B increases revenue by $60 million, but incurs additional medical costs of $45 million and company A incurs additional medical costs of $45 million.
• If neither company pollutes, both companies earn zero profits
• If both companies pollute, both companies increase revenue by $60 million, but both companies also incur additional medical costs of $90 million.
What is the outcome if both companies do what is in their own best interest? Is this outcome socially optimal?
◦ company A pollutes and company B does not, yes
◦ company B pollutes and company A does not, no
◦ neither company pollutes, yes
◦ both companies pollute, no
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