A chemical producer dumps toxic waste into a river. The waste reduces the population of fish, reducing profits for the local fishery industry by $150,000 per year. The firm could eliminate the waste at a cost of $100,000 per year. The local fishing industry consists of many small firms.
a. Apply the Cease theorem to explain how costless bargaining will lead to a socially ancient outcome, no matter to whom property rights are assigned (either to the chemical firm or the fishing industry).
b. Verify the Coast theorem if the cost of eliminating the waste is doubled to $200,000 (with the benefit for the fishing industry unchanged at $150,000).
c. Discuss the following argument: ‘‘A community held together by ties of obligation and mutual interest can manage the local pollution problems.''
d. Why might bargaining not be costless?