A fishing company on a lake has the following production function:
Fish caught per month = 100*L0.4*K0.5
where: L = hours of labor per month (currently 1000)
K = capital invested (currently $100,000).
A new industry opens upstream of the lake, and pollutes the water. As a result, the first coefficient in the fishing company's production function falls from 100 to 50. Is this externality a cost or a benefit to society? If the company keeps its levels of L and K the same, what is the change in the number of fish caught? If the fish catch is worth $0.80/fish to society, what is the cost or benefit to society of the externality in monetary terms?