Question
A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by
A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month.
(i) Suppose transactions costs are zero. Also suppose the chemical plant is not liable for the farm's crop damages and can continue to pollute the stream (the chemical plant has the property right to the stream). What will be the result of private bargaining between the farm and the chemical plant? Is this the efficient outcome? Explain.
(ii) Suppose transactions costs are zero. Also suppose the chemical plant is liable for the farm's crop damages (the farmer has the property right to the stream). What will be the result of private bargaining between the farm and the chemical plant? Is this the efficient outcome? Explain.
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