A factory is located next to a laundromat, and soot from the factory accumulates on the freshly washed clothes, significantly reducing demand for the laundromat's services. The owner of the laundromat asks the court to prevent the factory from emitting soot.
a. Assuming that there are no transactions costs between the owners of the two business which among the following are affected by the court's decision and which are not?
(i) The number of goods produced at the factory.
(ii) The prices at the laundromat.
(iii) The wealth of the factory owner.
(iv) The wealth of the laundromat owner.
Explain briefly.
b. Now suppose instead that transactions costs make it impossible for the owners of the two business to negotiate with each other. Assume that the court is interested in fostering efficiency. Give an example of a circumstance where it would be a mistake to rule against the laundromat. Give an example of a circumstance where it would be a mistake to rule for the laundromat.