The company Tough Textiles is considering to dispose its chemical waste into a nearby river. These chemicals will affect downstream fish reproduction, greatly reducing the number of fish that fishermen will be able to catch in the river.

At a cost of $200, Tough Textiles can filter out the toxins in the chemical waste. By doing this, there would be no effect on fish reproduction, and hence, fishermen's businesses would not be affected. The relevant profits (in thousands of dollars) for the two parties involved are listed below.

	With Filter	Without Filter
Tough Textiles	$300	$500
Fishermen	$400	$50

For example, Tough Textiles earns an profit of $500 without the filter. Installing the filter will cost the firm $200, reducing its profits down to $300. Not installing the filter will impose a cost of $350 on the fishermen: without the filter their profits will be only $50, whereas if the filter is installed, their profits will be $400. Tough Textiles and the fishermen are the only economic agents affected by the filter installation.

(a) From an economic efficiency perspective, should the filter be installed? Explain. (4 marks) In the remaining parts, suppose that there is no law requiring Tough Textiles to install the

filter and currently there is no filter in place.

(b) Are the Fishermen willing to pay Tough Textiles to install the filter? If so, what is the

maximum Fishermen are willing to pay Tough Textiles to install the filter? (2 marks)

(c) If negotiations are free, will Tough Textiles and the fishermen come to an agreement that results in the filter being installed? If your answer is no, then explain why this is the case. If your answer is yes, which party would have to make a payment and what can you say about

how much would this payment be? (4 marks)

(d) Will an agreement be possible if negotiations requires a lawyer at a cost of $200? (3 marks)