A chemical producer dumps toxic waste into a river. The waste decreases the population of fish, decreasing profits for the local fishing industry by $100,000 per year. The firm could eliminate the waste at a cost of $600,000 per year. The local fishing industry having of many small firms.
a) Using the Coase Theorem, describe how costless bargaining will lead to a socially efficient outcome, regardless of whether the property rights are owned by the chemical firm of the fishing industry.
b) Why might bargaining not be less expensive?
c) How would your answer to part (a) change if the waste decreases the profits for the fishing industry by $40,000? (Suppose, as before, that the firm could eliminate the waste at a cost of $60,000 per year.)