Question: suppose there is a firm in the town of state...
Suppose there is a firm in the town of State College that is polluting the water in several of the town’s lakes. The damages to the town from the pollution (the marginal emissions damages or MED), and the benefits to the firm of emitting the pollution (marginal emissions benefits or MEB), are shown in the figure below.
b) (10 points) What level of pollution will emerge from a Coasian bargain? (Hint: You need to first find the equations for the MED and MEB lines, and then set them equal to find the optimal price 𝑃∗ and quantity 𝑄∗.)