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Suppose a chemical factory discharges waste products into a river resulting in significant damages to a local fishery. The marginal damage and the marginal abatement cost (MAC) are given by:
MDC = 10E and MAC = 1,200-5E.
a. If the chemical factory has the property right to use the river what bargaining will result in the socially efficient equilibrium? What are the net gains experienced by each party?
b. If the fishery has the property right to use the river what bargaining will result in the socially efficient equilibrium? What are the net gains experienced by each party?
If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale. I
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