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2) Suppose there is a chemical factory located next to a farm. Air and water pollution from the factory damage crops on the farm. The marginal benefits of emissions to the factory and the marginal costs from the emissions to the farmers crops are as follows: Cost or Benefit (S) 360 MC 270 180 90 MB 900 450 Quantity of Pollution a. From an economic perspective, what is the best solution to this environmental conflict of interest? Hint: What is the optimal level of pollution? What is the optimal price of pollution? Explain how this is determined. (2 pts) b. Assume the farmer owns the property rights. (2 pts each) i. How much will the factory pay the farmer for the right to pollute? ii. Calculate net benefits (benefits - costs) for the farmer.

iii. Calculate net benefits for the factory. iv. What is the total net gain from Coase bargaining? c. Assume the factory owns the property rights. (2 pts each) i. How much will the farmer pay the factory to reduce the amount the factory pollutes? ii . Calculate net benefits (benefits - costs for the farmer iii. Calculate net benefits for the factory. iv. What is the total net gain from Coase bargaining?

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