home / homework help / questions and answers / business / economics / suppose there is a steel mill Show more home / homework help / questions and answers / business / economics / suppose there is a steel mill that pollutes a river. Question Suppose there is a steel mill that pollutes a river. There is a town downstream that suffers from the polluted water. Suppose that the town people are able to accurately measure the level of pollution in the river at any given time (i.e. there are clearly defined property rights and full information). The steel mill experiences benefits from polluting such that marginal benefits are MBmill = 100-Q where Q is the quantity of pollution in tons dumped in the river on any given day. Meanwhile the town experiences costs due to the pollution represented by the daily marginal cost curve MCtown = Q. For every question answer for both cases: Case 1: The steel mill has the right to pollute. Case 2: The towns people have the right to clean water above the ambient level of 0 quantity of pollution emitted. a) Before any negotiation between the mill and the towns people how much pollution is being dumped? Explain why this is not socially optimal? b) After negotiation between the mill and the towns people assuming no transaction costs how much pollution will be dumped? What is the willingness to accept for the right holder [i.e. price]? What is the total expenditure on permits of the non-right holder? c) What is the level of welfare for the mill and the town peoples welfare before and after negotiations? d) What is total welfare before and after negotiations? e) If a benevolent social planner can choose to initially give rights to either party based on your answers [a-d] who should be given the right? Explain. [Note: this is NOT a normative question] Show less

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