Question

(Cap-and-trade) A paper mill is located on a river and a commercial salmon shery is operating on the same river. The fishery can operate at one of two locations: upstream (above the mill) or downstream (in the polluted part of the river). Pollution lowers profits for the fishery; without pollution, profits are $300 upstream and $500 downstream; with pollution, profits are $200 upstream and $100 downstream. The mill earns $500 in profits and technology exists for it to build a treatment plant at the site that completely eliminates the pollution, but at a cost of $200. There are two possible assignments of property rights: (i) the shery has the right to a clean river and (ii) the mill has the right to pollute the river.

What is the maximal social welfare?

Group of answer choices

$800

$600

$1000

$700

Following Question MT1, what is the difference of outcomes under the two property rights regimes, when there is no possibility of bargaining?

Group of answer choices

$100

$200

$0

$300

What is your answer to question MT1 if the two firms can bargain costlessly and with full information?

Group of answer choices

$0

$100

$200

$300

Answer 1

The answers are as follows:-

1)800 dollars

This is case scenario in which the mill pays to clean the pollution and fishery sets up downstream meaning the mill earns 300 and the fishery earns 500.

2)100 dollars

The fishery will set up upstream while the mill will keep all it's profits hence leading to a net benefit to society of 700 follars which is 100 less than the best case scenario.

3)0 dollars

If the firms can bargain without cost,there should be no difference between soial welfare and the agreement.