Consider a rational producer who maximizes profits. He sells his output at a fixed market price. His production also inflicts damage on the environment and this imposes an additional cost on his neighbours.

a) Assume his neighbours and the polluter can bargain on the level of output. In the context of Coase theorem, and with a help of carefully labeled diagrams discuss (I) a situation where the polluter holds property rights to the environment

(ii) a situation where the neighbours of the polluter hold property rights to the environment. In both cases comment on the maximum and minimum size of respective bribes/payments and on the level of output

a) Assume that the neighbours and the polluter can bargain on the level of output. In the context of Coase theorem, and with a help of a carefully labeled diagram discuss (1) a situation where the polluter holds property rights to the environment (ii) a situation where the neighbours of the polluter hold property rights to the environment. In both cases comment on the maximum and minimum sizes of respective bribes/payments and on the level of output. Note that the question does not ask you to calculate the specific amounts. You are asked for a verbal and graphical explanation (8 marks) b) With a help of a properly labelled graph discuss a tax policy that would eliminate the negative effects of the externality. (4 marks, be brief and to the point) C) Meanwhile back in the real world... Outline-the practical limitations of Coase theorem as relevant to modern developed economies. (4 marks, be brief and to the point)