1. Consider a pollution p

1. Consider a pollution p

1. Consider a pollution problem involving a paper mill located on a river and a commercialsalmon ?shery operating on the same river. The ?shery can operate at one of twolocations: upstream (above the mill) or downstream (in the polluted part of the river).Pollution lowers pro?ts for the ?shery: without pollution, pro?ts are $300 upstreamand $500 downstream; with pollution, pro?ts are $200 upstream and $100 downstream.The mill earns $500 in pro?t, and the technology exists for it to build a treatment plantat the site that completely eliminates the pollution, but at a cost of $200. There aretwo possible assignments of property rights: (i) the ?shery has the right to a cleanriver and (ii) the mill has the right to pollute the river.(a) What is the e?cient outcome (the maximum of total joint pro?t)? Speci?cally,where does the ?shery locate and does the mill build a treatment plant or not?(b) What are the outcomes under the two di?erent property rights regimes when thereis no possibility of bargaining? What are the pro?ts of the ?shery and mill ineach case?(c) How does your answer to (b) change when the two ?rms can bargain costlessly?

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