When a firm that generates a negative externality (like a polluting factory) is acquired by the firm that suffers the consequences (like a downstream fishery), the external cost is said to be __________, which incentivizes the new, unified company to reduce the externality-producing activity to maximize its overall profit.
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Strategic Acquisition Analysis: Chemical Plant and Farm
A leather tannery is located upstream from a popular fishing resort. The tannery's operations discharge waste into the river, which significantly reduces the fish population and harms the resort's profits. If the owner of the fishing resort decides to purchase the leather tannery, creating a single unified company, what is the most likely outcome for the tannery's production level and why?
Cost Internalization in a Unified Firm
Impact of Unified Ownership on Production Decisions
Impact of Unified Ownership on Production Decisions
True or False: A power plant that releases hot water into a river is purchased by a downstream fish farm that suffers from the warmer water. To maximize its new combined profits, the merged company will continue to operate the power plant at its original, pre-merger output level.
A large-scale pig farm is located upstream from a popular lakeside resort. Waste runoff from the farm pollutes the lake, reducing the resort's profitability. The owner of the resort then purchases the pig farm, creating a single, unified company. Match each description to the economic concept it represents in this scenario.
A steel mill's production process pollutes a river, which reduces the profits of a downstream commercial fishing business. The fishing business acquires the steel mill, forming a single, unified company. From the perspective of the unified company's profit maximization, how will the marginal cost of producing steel be viewed, and what will be the resulting effect on the steel mill's output?
Change in Managerial Objective after Merger
When a firm that generates a negative externality (like a polluting factory) is acquired by the firm that suffers the consequences (like a downstream fishery), the external cost is said to be __________, which incentivizes the new, unified company to reduce the externality-producing activity to maximize its overall profit.