3) Consider the model of firm 1's output of x leading to a detrimental externality (pollution) for firm 2, e(x) (environmental damages)

a) Prove that by allowing for a market for pollution and assuming that the firms are price takers in all markets, that the market outcome will be efficient. You need to only do this for one of the two possible specifications for property rights.

b) There have been claims that Coase proved that under either specification for property rights the outcome is the same efficient outcome. Explain why that is not true.

c) Why is important to extend the model to many buyers and sellers and thus multilateral externalities? Fully explain. d) With multilateral externalities; what problem for efficiency arises?