The Johnson Steel Company generates water pollution when it makes steel. It could eliminate this pollution at a cost of $700. The Smith family lives downstream. It suffers $1,000 of damages from the water pollution Johnson creates.
a. Suppose first that the law says Johnson has the right to pollute. Show that if Johnson and the Smith family negotiate, Johnson will eliminate the pollution.
b. Now suppose the law is changed so that the Smith family has the right to enjoy clean water. Show that Johnson will eliminate the pollution even if Johnson and the Smith family can negotiate. Is the Smith family better off now than in part (a)?