Problem
A chemical producer dumps toxic waste into a river. The waste reduces the population of fish, reducing profits for the local fishing industry by $100,000 per year. The firm could eliminate the waste at a cost of $60,000 per year. The local fishing industry consists of many small firms.
a) Using the Coase Theorem, explain how costless bargaining will lead to a socially efficient outcome, regardless of whether the property rights are owned by the chemical firm or the fishing industry.
b) Why might bargaining not be costless?
c) How would your answer to part (a) change if the waste reduces the profits for the fishing industry by $40,000? (Assume, as before, that the firm could eliminate the waste at a cost of $60,000 per year.)
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.