Problem 13 Suppose there is a firm in the town of Oakley that pollutes the water of the town’s lake. The damages to the town from the pollution, and the cost to the firm of cleaning up the pollution, are shown in the following figure.

Problem 13

Suppose there is a firm in the town of Oakley that pollutes the water of the town’s lake. The damages to the town from the pollution, and the cost to the firm of cleaning up the pollution, are shown in the following figure.

a. What does the Coase Theorem tell us to expect if an alienable right to prevent pollution is given to the town?

b. What level of pollution will emerge from a Coasian bargain? Provide a numerical answer.

c. What is the range of payments the firm might make to the town following a mutually agreeable bargain? Provide a numerical answer.

d. How does your answer change if the initial property right in pollution is given to the firm? Provide a numerical answer.

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