Externality among two oil companies and the solution for the externality.
From an economic and technical standpoint, there is an optimal rate at which to extract oil from an oil field. In the mid 90's. mobil was producing 60,000 barrels of oil per day (bpd) and shell was producing 75,000 bpd from adjacent fields in CA.
(a) Illustrate what are the externalities between the oil production of the two oil companies?
(b) If the 2 companies negotiate an agreement, should they aim to increase or reduce production?
(c) Assess the likelihood that the externality would be resolved.