Suppose the marginal damage and marginal benefit curves in a pol- luted neighborhood are MD = P/3 and MB = 4 – P. Also, suppose that transactions costs are low, so that the neighborhood residents and the firm can bargain. We saw that in this case, the socially optimal level of pollution is achieved. Start by computing the socially optimal P. Then, for each of the following cases, compute the amount of money trans- ferred through the bargaining process, and indicate who pays whom (i. e., whether consumers pay the firm, or vice versa). Also, compute the gains to each party relative to the status quo (i. e., the starting point of the bargaining process).
(a) Residents have the right to clean air; firm is dominant in the bar- gaining process.
(b) Residents have the right to clean air; residents are dominant in the bargaining process.
(c) Firm has the right to pollute; firm is dominant in the bargaining process.
(d) Firm has the right to pollute;residents are dominant in the bargain- ing process.