Calculating Surplus Distribution in a Coasean Bargain
A factory's operations generate a profit of $1,000, but its pollution causes $700 in damages to a neighboring resort. The factory can eliminate the pollution by installing a filter at a cost of $400. Assume the resort is granted the legal right to a clean environment and that costless negotiation is possible. Calculate the total economic surplus (total net benefit) generated in the efficient outcome and explain how this surplus is distributed between the factory and the resort.
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