the subject is law and economics

Question 2 The vaccine manufacturer ACME (A) pollutes a nearby commercial greenhouse TOMATOES (T). A could eliminate their pollution by installing special scrubbers (cleaning equipment) at a cost of 500. Similarly, T can eliminate pollution by installing filters on its ventilation system at a cost of 100. A's profit without scrubbers is 1000. T's profit is 500 with no pollution (and no filters installed), and 100 with pollution (no filters or scrubbers). Hence, in the absence of filters and scrubbers A's pollution reduces T's profits by 400. a) The situation is illustrated in the payoff matrix below. A and T simultaneously choose between installing scrubbers or not and between installing filters or not. Suppose A has the right to pollute and assume that high transaction costs precludes a cooperative solution. What is the non-cooperative equilibrium? Indicate the solution in the payoff matrix. Is it efficient? Explain! (A's payoffs is the first in each cell) (5p) T No filter Filter No Scrubbers 1000, 100 1000, 400 A Scrubbers 500, 500 500, 400 b) Suppose that a court entitles T compensatory damages from A if A pollutes without installing scrubbers (A only has to pay damages if A does not install scrubbers and T does not install filters). Redraw the above payoff matrix and find the new non-cooperative equilibrium. Compare the efficiency of this equilibrium to that under a). If it is different, explain why and what this implies for efficiency. (10p) c) Let us now assume that transaction costs are low and that A and T can cooperate. Find the cooperative solutions for the cases where i) A has the right to pollute (as in a) ii) T has the right to compensatory damages (as in b). How does efficiency differ between i) and ii) (if at all)? How does the distribution of payoffs between A and T differ between cases i) and ii) (if at all)? Explain your results and relate them to the Coase theorem. (10p)