Consider a river, with no associated property rights. A downstream resort uses the river for fishing and swimming, for guests. An upstream feedlot uses the river for waste disposal. The two parties with conflicting interests are unable to negotiate with each other, due to lack of clearly assigned property rights, and the government refuses to regulate in any way. The marginal benefit of abatement, to the downstream resort, is given by: MB(A) = 100 – (A/2) Meanwhile, the marginal cost of abatement to the upstream feedlot is given by: MC(A) = (A/4)

a) What is the market determined equilibrium level of abatement?

b) At the equilibrium level of abatement, what are the total damage costs?

c) At the socially optimal level of abatement i) what is the quantity of abatement? ii) what are the total benefits of abatement? iii) what are the total costs of abatement? iv) what is the increase in social surplus, compared to the equilibrium in (a)?

2. What would the negotiated level of abatement be, according to Coase

a) if the rights to clean water were clearly assigned to the resort owner?

b) if the rights to pollute were clearly allocated to the feedlot?

3. What is the minimum it is going to cost a) the feedlot, if rights to clean water are allocated to the resort? b) the resort, if rights to pollute are are allocated to the feedlot?