Bargaining Over an Externality
A chemical plant's operations generate a profit of $500,000 but cause $200,000 in damages to a downstream oyster farm. The farm's profit without the damage would be $300,000. The plant can install a filtration system for $150,000, which would eliminate the damage completely. Assume the plant has the legal right to operate without the filter. Explain how a private bargain could still result in the filter being installed. In your explanation, identify the minimum payment the plant would accept and the maximum payment the farm would be willing to offer.
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