Assignment Task: An island nation has a lucrative fishery in its waters, and a single company holds the license to fish there. On the land, there is a large sugar industry, owned by a single firm that exports to the global market. Pollution from the sugar industry lowers profits from the fishery. Without pollution, the fishery could earn $300m in profits, but with pollution it only earns $100m. The sugar company earns $500m profits, and could eliminate pollution at an additional cost of $150m.
There are two possible assignments of property rights:
1. The sugar industry has the right to pollute
2. The fishery has the right to a clean ocean
Assume that the fishery and the sugar company can bargain costlessly. What bargain do they make under the two different property regimes? Is the optimal outcome achieved?
Suppose that the fishing rights are not licensed to a single entity, and instead a large number of small boats are licensed to fish. Similarly, suppose that the sugar industry is made up of a large number of smaller companies. How likely are they to achieve the optimal outcome? Give reasons for your answer (no more than two sentences).