Question: Jack and May are the only residents of a small island. Jack operates a papermill, and has costs given by MPC = 10+2Q. Jack gets a price of $24 for each unit of paper he sells. May hates the pollution that the mill produces, and has damages given by MEC = Q + 2.
(Q1) Assume that property rights to the environment are established, and Jack has them. Further, assume that Jack and May can engage in costless bargaining. What will Jack's production level Q_ be in equilibrium?
(Q2) What is the minimum amount May would have to pay for Jack to produce at Q_? What is the maximum amount May would be willing to pay for Jack to produce at Q_.
(Q3) If May had the property rights, what is the minimum payment Jack would have to make to produce at Q_? What is the most he would be willing to pay?