An upstream paper mill releases moderate amounts of pollutants into a waterway. A downstream fishery suffers an economic cost from this pollution of $100,000 annually. This cost burden would fall to $30,000 if the pollution were reduced by 50 percent. Complete (100 percent) cleanup would cost the mill $120,000, whereas a 50 percent cleanup would cost $50,000.
a. Currently, the mill has the legal right to pollute. Can the parties come to a mutually beneficial agreement to reduce pollution? If so, how much pollution should be reduced?
b. Answer part (a) assuming the fishery has the legal right to clean water.