Suppose there is a factory located on a river and downstream of the factory is a business that rentskayaks and a different business that rents innertubes used to float down the river. If allowed topollute the river, the factory's profits are $2,000. The most cost effective way for the factory toeliminate this pollution is by reducing the amount of dangerous materials used in their productionprocess. This change in the production process would reduce the factory's profits from $2,000 to$1,000. The profits of the kayak rental business are $800 if the river is not polluted and $500 if theriver is polluted and the business remains downstream of the factory. However, the kayak rentalbusiness can obtain profits of $600 if they move their kayak rental business upstream of the factory.The profits of the innertube rental business are $1100 if the river is not polluted and $500 if the riveris polluted and the business remains downstream of the factory. However, the innertube rentalbusiness can obtain profits of $850 if they move their kayak rental business upstream of the factory.Suppose the courts issue an injunction to the factory which stipulated that they must stop pollutingthe river unless the kayak and innertube rental businesses reach an agreement with the factoryallowing the factory to pollute.a) Given this situation, what is the socially efficient outcome? Explain.Suppose the bargaining game is such that the factory initially decides whether to negotiate or not. Ifthey don't negotiate, the factory changes their production process and stops polluting the river. Ifthey decide to negotiate, they first meet with the owners of the kayak rental business and the kayakrental owners make a take-it-or-leave-it offer to the factory owners of Pk which the factory ownerscan either accept or reject. If the factory owners reject the PK offer, then the factory changes theirproduction process and stops polluting. If the factory owners accept the Pk offer, the factory pays thekayak rental owners Pk for the kayak owners to allow them to pollute. However, this acceptance (andpayment) is based on the stipulation that they reach agreement with the innertube owners. If there isan acceptance of PK, the factory owners meet with the owners of the innertube business and theinnertube owners make a take-it-or-leave-it offer to the factory owners of Pi which the factoryowners can either accept or reject. If the factory owners reject the P₁ offer, then the factory changestheir production process and stops polluting. If the factory owners accept PI offer, then the factorypays the innertube owners P₁ and pays the kayak rental owners P to allow them to pollute. If thefactory does pollute, the kayak and innertube owners move upstream of the factory (don't really haveto model this decision in the game tree but you should take it into account in the payoffs).b) Depict this situation in a game tree.c) Based on Subgame Perfection, what would you expect the outcome to be? Provide details.d)What if instead of an injunction ruling, the courts issues a damage ruling. How would thischange the game tree and the expected outcome? Provide explanation.e) Now suppose transaction costs are very high. From an efficiency point of view, is aninjunction ruling or a damages ruling preferable? Explain.

Pollution externalities, negotiating tactics, societal efficiency, game theory, and the significance…

Suppose the courts issue an injunction to the factory which stipulated that they must stop polluting the river unless the kayak and innertube rental businesses reach an agreement with the factory allowing the factory to pollute. a) Given this situation, what is the socially efficient outcome? Explain.

Suppose the courts issue an injunction to the factory which stipulated that they must stop polluting the river unless the kayak and innertube rental businesses reach an agreement with the factory allowing the factory to pollute. a) Given this situation, what is the socially efficient outcome? Explain.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter12: Environmental Protection And Negative Externalities

Section: Chapter Questions

Problem 43P: A city currently emits 15 million gallons (MG) of raw sewage into a lake that is beside the city....

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