A number of firms have located in the western portion of a town after single-family residences took up the eastern portion. Each firm produces the same product and in the process emits noxious fumes that adversely affect the residents of the community.
a. Why is there an externality created by the firms?
b. Do you think that private bargaining can resolve the problem? Explain.
c. How might the community determine the efficient level of air quality?