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This question about the Coase theorem refers to the graph drawn at the end.
a) Suppose that polluters have the right to emit pollutants unrestricted and baseline emissions are at E=300. Explain why E*=200 is the efficient level of emissions. Why will it be reached when polluters have the right? What will be the increase in social welfare?
b) In negotiation, victims agree to pay polluters $75 per unit of pollution reduced. What will be the net gain for polluters and victims under this payment when pollution is reduced from 300 to 200? What will the social welfare be here? Now suppose that instead of a fee per unit, the victims agree to pay the polluters a fixed fee of $8000 to reduce pollution from 300 to 200. What will be the social welfare, net gain by polluters and net gain by victims?
c) Now suppose that victims have the rights. Calculate the increase in social welfare when polluters negotiate an increase in pollution from 0 to 200.
d) In negotiation, the polluter agrees to pay the victims $75 for each unit increase of pollution when pollution is increased from 0 to 200. What will be the net gain for polluters and victims under this payment when pollution is increased from 0 to 200? What will be the social welfare?
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