The Clean Air Act instituted trades between states for SO2 emissions. Several utility companies across geographic borders have engaged in such trades in recent years.
Consider a trade between a utility in Wisconsin and the TVA in Tennessee. Assume that the trade reduces Wisconsin electricity consumers' bills by a total of $ 1 million, and lowers Tennessee electricity consumers' bills by $ 500,000. Also assume that the trade improves local environmental quality in Wisconsin by an amount that people value at $ 2 million.
If the local environmental quality in Tennessee declines as a result of this trade, then indicate a potential Coase agreement that could avoid the environmental decline and would still make the trade profitable to both parties ? Is such a trade possible in this scenario?