Calculating the Bargaining Range for an Externality
A plantation's production of bananas creates a negative externality for a downstream fishery due to pesticide runoff. The table below shows the plantation's profits and the fishery's losses at different levels of banana output. Assume the plantation has the legal right to produce as much as it wants and that transaction costs for negotiation are zero. Analyze the data to determine the range of annual payments the fishery could offer the plantation to convince them to reduce their output from their profit-maximizing level to the level that maximizes the total combined surplus for both parties. Explain your reasoning.
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