Suppose that a factory discharges hazardous waste that can contaminate the ground water resulting in adverse effects on human health. Currently, the factory has profits of $100 million. The factory could use an alternative manufacturing process that would cost an additional $8 million and would completely eliminate the hazardous waste. The harm caused by the hazardous waste to the residents of the surrounding community is $20 million (i.e. the value of the effect on their health). Assume the assumptions of the Coase Theorem hold.

(a) If the residents are assigned property rights to the ground water and can make a take-it-or-leave-it offer, what will be the dollar transfer between the parties? What will be the outcome?

(b) If the firm is assigned property rights to the ground water and has the right to pollute, what will be the predicted outcome and the dollar transfer between the two parties if the firm can make a take-it-or-leave-it offer?

(c) Now assume that instead of completely eliminating ground water contamination, the factory can eliminate almost all of it, causing the residents harm equivalent to $0.1 million. How, if at all, does this modification in technology affect the answers to part a) and b)?

(d) Why might the assumptions of the Coase Theorem fail? Give examples