Suppose that a laundry and steel plant are located next to each other. The steel plant can install

a scrubber that cleans out all pollutants and the laundry can install a filter that prevents any

pollutants from entering the laundry. Both devices cost money which lower profits.

The payoff to the two companies is given below. The first entry is the profits of the steel company

while the second number (after the comma) is the profits of the laundry.

No

Filter Filter

No Scrubber 700, 300 700, 500

Scrubber 500, 600 500, 400

a) Given the numbers above, what is the efficient outcome? Explain

Suppose transaction costs are zero.

b) If the steel company has the right to pollute what will happen? What will each company do?

Explain.

c) If the laundry has a right to pollution free environment and the steel company must pay for

damages, what will happen? What will each company do? Explain.

Now, suppose the laundry has a right to zero pollution and transaction costs are high.

d) Will it make a difference if an injunction requiring the steel company to install a scrubber is

imposed versus requiring the steel company to pay damages to the laundry? Why or Why not?

Explain.