09 Jul Lounge and the Bulge
Consider two popular nightclubs in Pawnee, called the Snakehole Lounge and the Bulge. Unfortunately, both clubs cause noise pollution. Fortunately, there is a technology that the clubs can adopt to help reduce the noise pollution (sound absorbing panels). The cost of adopting this technology is different for each club. For the Snakehole Lounge, the marginal cost of reducing noise pol- lution is 10. On the other hand, for Bulge, this cost is 5. In essence the marginal cost of noise reduction for both firms is constant. Both nightclubs produce 15 units of noise pollution. Suppose that the social marginal benefit of noise reduction is described by the following linear function 30 — (ZS + 23) where 25 and 23 are the total reduction of the Snakehole Lounge and the Bulge respectively.
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