Suppose that the residents own their homes and the river. Now the factories must pay a fee to the homeowners for the right to dump waste into the river. The greater the quantity of waste dumped, the more the factories must pay. So again, the factories face the opportunity cost of the pollution they create as part of their marginal private cost. The quantity of paint produced and the amount of waste dumped are the same whoever owns the homes and the river. If the factories own them, they bear the cost of pollution because they receive a lower income from home rents. If the residents own the homes and the river, the factories bear the cost of pollution because they must pay a fee to the homeowners. In both cases, the factories bear the cost of their pollution and dump the efficient amount of waste into the river.

Figure 10.3 Property Rights Achieve an Efficient Outcome