For a particular product y, the average cost of production (AC) is given by the expression: AC = 20+

2.5 y. The demand for good y is: P = 152-0.5y. Assume that the production of y also creates an external effect for its neighbors, the average value of which is given by the expression: E = 12+0.754

a) Assume that the firm has the proty rights. In the absence of an agreement with its neighbors, what level

of output would it want to produce? Suppose that the neighbors negotiate with the firm. To what level of output would the negotiations lead? What is the minimum payment that the neighbors must make to the

firm to achieve this change in output? What is the maximum payment?

b) Assume that the neighbors have the property rights. In the absence of an agreement between the firm

and its neighbors, what would the level of output be? If an agreement between the firm and its neighbors is

negotiated, what are the smallest and largest payments that the firm would have to pay?

c) Assume that the firm has the property rights. If the government wishes to control 8the externality, what

should the rate of the Pigouvian tax/subsidy be? What is the amount of an equivalent lump-sum tax subsidy?

How much revenue does government collect?