1. 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)qon each of 20 households near the well.

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 household senforce their property rights against the O&Gs pollution?