Suppose there is a factory located on a river and downstream of the factory is a business that rents kayaks and a different business that rents innertubes used to float down the river. If allowed to pollute the river, the factory's profits are $2,000. The most cost effective way for the factory to eliminate this pollution is by reducing the amount of dangerous materials used in their production process. This change in the production process would reduce the factory's profits from $2,000 to $1,000. The profits of the kayak rental business are $800 if the river is not polluted and $500 if the river is polluted and the business remains downstream of the factory. However, the kayak rental business can obtain profits of $600 if they move their kayak rental business upstream of the factory. The profits of the innertube rental business are $1100 if the river is not polluted and $500 if the river is polluted and the business remains downstream of the factory. However, the innertube rental business can obtain profits of $850 if they move their kayak rental business upstream of the factory. Suppose the courts issue an injunction to the factory which stipulated that they must stop polluting the river unless the kayak and innertube rental businesses reach an agreement with the factory allowing the factory to pollute. a) Given this situation, what is the socially efficient outcome? Explain. Suppose the bargaining game is such that the factory initially decides whether to negotiate or not. If they don't negotiate, the factory changes their production process and stops polluting the river. If they decide to negotiate, they first meet with the owners of the kayak rental business and the kayak rental owners make a take-it-or-leave-it offer to the factory owners of Pk which the factory owners can either accept or reject. If the factory owners reject the P offer, then the factory changes their production process and stops polluting. If the factory owners accept the Pk offer, the factory pays the kayak rental owners Pk for the kayak owners to allow them to pollute. However, this acceptance (and payment) is based on the stipulation that they reach agreement with the innertube owners. If there is an acceptance of Pk, the factory owners meet with the owners of the innertube business and the innertube owners make a take-it-or-leave-it offer to the factory owners of P which the factory owners can either accept or reject. If the factory owners reject the Pi offer, then the factory changes their production process and stops polluting. If the factory owners accept PI offer, then the factory pays the innertube owners P and pays the kayak rental owners Pk to allow them to pollute. If the factory does pollute, the kayak and innertube owners move upstream of the factory (don't really have to model this decision in the game tree but you should take it into account in the payoffs). b) Depict this situation in a game tree. c) Based on Subgame Perfection, what would you expect the outcome to be? Provide details. d) What if instead of an injunction ruling, the courts issues a damage ruling. How would this change the game tree and the expected outcome? Provide explanation. e) Now suppose transaction costs are very high. From an efficiency point of view, is an injunction ruling or a damages ruling preferable? Explain.