Suppose that the inverse demand for shale gas is given by p = 400 - 2q. The private marginal cost of producing shale gas is PMC = 100 + q. Suppose that in order to produce shale gas at the PMC given above, the oil and gas (O&G) companies (that produce the gas) must transport drilling equipment and millions of gallons of water to and from the shale gas well. Suppose that visual disamenities, air pollution, and noise pollution impose costs of (1/10)q on each of 20 households near the well.

1. Imagine that a regulator determines that the O&Gs have a right to cause visual disamenities and air and noise pollution. What is the maximum amount the 20 households (together) would be willing to pay in order to reduce the "pollution" to the socially optimal level? Assume that they are the only ones hurt by the pollution. What is the minimum amount that the O&Gs are willing to accept to reduce pollution to the optimal level? Can an efficient level of shale gas production (and pollution) be achieved by assigning rights to the O&Gs?

2. If instead local ordinances granted the households the right to be free from the pollution, could an efficient outcome be achieved by voluntary exchanges between the households and the O&Gs? Would the households be better off or worse off than if the property rights were assigned to the O&Gs? Show your work. How would the households enforce their property rights against the O&Gs pollution?

3. Now suppose the households decide to buy the local O&G that is causing the pollution.They are the only owners of the firm. Now what is the private equilibrium price and quantity of shale gas production. How does this equilibrium compare to the socially optimal price and quantity?