Suppose that no one owns the river and that the government issues two marketable pollution permits: one to the cotton grower and one to the city. Each permit allows the same amount of pollution of the river, and the total pollution created is the efficient amount. What is the quantity of cotton produced and what is the market price of a pollution permit? Who buys and who sells a permit?
The figure illustrates the market for cotton. Consider a small town surrounded by a large cotton farm. Suppose that the cotton grower sprays the plants with chemicals to control insects and the chemical waste flows into the river passing through the town. The marginal social cost of producing the cotton is double the marginal private cost.

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FIGURE 17.1 Problems 1 to 5 150 125 100 75 50 25 100 200 300 400 500 Quantity (tons per month)