Eddie's Electric Company emits smoke that dirties the wash hanging at Lucille's Laundry. Eddie's can completely...

 

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Eddie's Electric Company emits smoke that dirties the wash hanging at Lucille's Laundry. Eddie's can completely abate the pollution by installing scrubbers on its stacks, and Lucille's can completely exclude the smoke by installing filters on its ventilation system. Installing filters is cheaper than installing scrubbers. No one else is affected by this pollution because Eddie's and Lucille's are near to each other and far from anyone else. Lucille's initiates court proceedings to have Eddie's declared to be a "nuisance." Suppose that: л(E)- gross profit to Eddies C(E)- cost of scrubbers a. Complete the payoff table below: EDDIES II(L) - gross profits to Lucille c(L) cost of filter D(L) - pollution damage cost to Lucille No Scrubber Scrubber No Filter л(E), л(L) - d(L) л(E) - с(E), л(L) LUCILLE Filter T(E), π(L) - c(L) л(E) – с(E), л(L) – c(L) What must be true for the non-cooperative equilibrium to be {No Filter, Filter}? b. Assume that the condition you found from part (a) holds, and that c(E) > d(L). Suppose there are three possible rules: i) polluter's right; ii) pollutee's right to damages; iii) pollutee's right to injunction. For each rule determine the outcome. Which rule or rules lead to the efficient outcome? c. Suppose now that the parties can bargain. For the rules from (a) that did not lead to the efficient solution explain how bargaining will lead to the efficient solution. Discuss using the concepts of cooperative surplus and threat points. Eddie's Electric Company emits smoke that dirties the wash hanging at Lucille's Laundry. Eddie's can completely abate the pollution by installing scrubbers on its stacks, and Lucille's can completely exclude the smoke by installing filters on its ventilation system. Installing filters is cheaper than installing scrubbers. No one else is affected by this pollution because Eddie's and Lucille's are near to each other and far from anyone else. Lucille's initiates court proceedings to have Eddie's declared to be a "nuisance." Suppose that: л(E)- gross profit to Eddies C(E)- cost of scrubbers a. Complete the payoff table below: EDDIES II(L) - gross profits to Lucille c(L) cost of filter D(L) - pollution damage cost to Lucille No Scrubber Scrubber No Filter л(E), л(L) - d(L) л(E) - с(E), л(L) LUCILLE Filter T(E), π(L) - c(L) л(E) – с(E), л(L) – c(L) What must be true for the non-cooperative equilibrium to be {No Filter, Filter}? b. Assume that the condition you found from part (a) holds, and that c(E) > d(L). Suppose there are three possible rules: i) polluter's right; ii) pollutee's right to damages; iii) pollutee's right to injunction. For each rule determine the outcome. Which rule or rules lead to the efficient outcome? c. Suppose now that the parties can bargain. For the rules from (a) that did not lead to the efficient solution explain how bargaining will lead to the efficient solution. Discuss using the concepts of cooperative surplus and threat points.

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