Reference no: EM133131996

A charcoal manufacturer (C) is located next to a fabric manufacturer (F). F produces a fabric that is used to make white bedsheets, and as part of the process, hangs the bleached fabric outside to dry. The smoke that C emits in producing charcoal stains the fabric. Under this situation, the value of production for C is 800, and the value of production for F is 300. It's possible for F to build a larger facility and fans so that it can dry the bleached fabric indoors. This would cost 300 but would generate an additional economic surplus (not including the cost of building the larger facility) of 400. More specifically, F earns 700 either when C does not emit smoke or when C emits smoke and F has built the larger facility (700 does not include the cost of building the larger facility).

Part A: Suppose that it is illegal for C to emit smoke without F's permission. Assuming C and F can negotiate costlessly, and the negotiation is such that any gains in total economic surplus (that result from their bargaining) are split equally between them, what is the outcome of negotiation? Does F build the larger facility?

Part B: Suppose that it is legal for C to emit smoke without F's permission. Assuming C and F can negotiate costlessly, and the negotiation is such that any gains in total economic surplus (that result from their bargaining) are split equally between them, what is the outcome of negotiation? Does F build the larger facility?

Part C: Suppose that a large corporation purchases both C and F (to produce charcoal and fabric). What will the large corporation choose to do for the production of charcoal and fabric at these facilities?