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A cement factory located near a city produces 10,000 tons of cement each month for a cost of $4 million

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A cement factory located near a city produces 10,000 tons of cement each month for a cost of $4 million.

The cement factory emits toxic chemicals that pollute the air. This air pollution causes illnesses for people in the city. Because of this, there is an increase of $500,000 in health-care expenditures and a loss of $300,000 in wages due to air-pollution-related sickness of the city's residents.

A. The private cost of producing 10,000 tons of cement is ($800,000, $3.2 million, $3.9 million, $4 million, $4.8 million) whereas the social cost is ($800,000, $3.2 million, $3.9 million, $4 million, $4.8 million). Suppose a new filter has been discovered that, if installed in the cement factory, it can decrease air pollution to levels that won't adversely affect the city's residents. That is, the city's residents wouldn't suffer any increase in health-care costs or any loss in wages from being sick. However, the filter increases the firm's costs by $600,000 per month.

B. Total social cost of producing 10,000 tons of cement would be minimized if (the filter were installed, the filter were not installed). Suppose the cement factory has air-pollution property rights. That is, the factory has the right to pollute the air. Also, the city residents and the cement factory can bargain with each other for no cost.

C. The city residents will be willing to pay as much as ($300,000, $500,000, $600,000, $800,000, $900,000) per month for the cement factory to install the filter. The cement factory will install a filter for at least ($300,000, $500,000, $600,000, $800,000, $900,000) per month. Thus, the city residents and the cement factory will reach an agreement where (the factory installs the filter, the factory does not install the filter). Now suppose that the city residents have clean-air property rights. That is, the people in the city have the right to clean air. The city residents and the cement factory can still bargain without cost.

D. Under these conditions, the city residents will allow the plant to produce cement without a filter for a payment of at least ($300,000, $500,000, $600,000, $800,000, $900,000) a month. The cement factory is willing to pay the city at most ($300,000, $500,000, $600,000, $800,000, $900,000) a month for the right to produce cement without a filter. Thus, as a result of bargaining, the factory will (install the filter, not install the filter).

E. The city residents will be (better off when they have air property rights, better off when the factory has air property rights, equally well off when they have air property rights as when the factory has air property rights).