Assume there is a firm which produces a type of pollution which it would be willing to eliminate for $500. There are 3 households that live far away from each other but are the only ones affected by the pollution. These 3 households would be willing to pay $100, $200, and $300 respectively to eliminate the pollution from the firm.

1) Explain whether or not it is efficient for the firm to keep polluting. Explain what happens if a court grants the "pollution rights" to the households.

2) Explain the result if a court awards the pollution rights to the firm, and a lawyer charges each household $50 to negotiate a settlement with the firm. No fee is paid if a settlement is not reached.