27.1 Pareto Efficiency Suppose that Fred and Anne operate neighboring businesses, and Fred's production process affects Anne's profits. Specifically, when Fred operates his factory without a filter over the factory's exhaust pipes, the water contamination that results will decrease Anne's daily profits from $140 to $90. However, using the filter is extremeley costly for Fred - operating without the filter will increase Fred's profits from $130 to $70. The table below shows the daily profits for each firm when Fred operates with or without a filter. Daily Profit With Filter Without Filter Fred 70 130 Anne 140 90 Which situation is Pareto Efficient - for Fred to use the filter, or not? Would Anne be willing to pay the full costs of the filter on Fred's behalf? Why or why not