A local town is under pressure from voters to close a polluting factory.The head of the homeowners' organization argues that the pollution is a menace, and if the full external costs of the pollution were calculated, the factory would not be profitable. The homeowners calculate that the pollution generates an external cost of $3,000,000 per year in medical bills and $1,000,000 per year in suppressed property values, which reflects the difference in home prices with and without pollution.That factory makes a profit of $5,000,000 per year.

(i)What is the external cost of the pollution? (-

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(ii)If the factory were forced to consider the total social costs of pollution, would it be profitable? (-

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(iii)How much could the town tax the factory before profits become zero? (-

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(iv)What does the Coase theorem suggest about negotiations between the town and the factory? (-

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