- An upstream paper mill releases moderate amounts of pollutants into a
waterway. A downstream fishery suffers an economic cost from this
pollution of $100,000 annually. This cost burden would fall to $30,000 if
the pollution were reduced by 50 percent. Complete (100 percent)
cleanup would cost the mill $120,000, whereas a 50 percent cleanup
would cost $50,000.
a. Currently, the mill has the legal right to pollute. Can the parties come
to a mutually beneficial agreement to reduce pollution? If so, how
much pollution should be reduced?
b. Answer part (a) assuming the fishery has the legal right to clean
water. - The United Mine Workers (UMW) and the Association of Coal
Producers are attempting to negotiate a new contract in which the
issues at stake are a wage increase, the introduction of a right-to-
strike clause, and a proposal that nonmining jobs at sites be opened
up to nonunion workers. Each $1.00 increase in the hourly wage
would raise the association’s total wage bill by $40 million. Besides
the wage issue, the UMW feels very strongly about the right-to-strike
clause; in fact, it would be willing to give up $.75 in wage increases to
secure it. It feels less strongly about reserving nonmining work for the
union and is willing to give up only $.50 in wages to retain this
provision. For its part, the association has attempted to calculate the
impact of each of these provisions. It judges that accepting the right-
to-strike clause might increase its costs by $50 million in the long
run and that opening site work to nonunion labor would save it
$60 million.
a. Under an efficient agreement, how should the parties decide the
right-to-strike and reserved-work issues?
b. As a variation on this example, suppose the current administration in
Washington has invoked emergency legislation to freeze mining wages
(as well as other prices and wages in the economy). The result is that
the right-to-strike and reserved-work clauses are the only issues under
negotiation; any wage change is prohibited. Now how should the
parties decide these issues to mutual advantage? - Firm B and firm S are in the process of negotiating a contract whereby S
will synthesize a hormone for B. Besides the payment from B to S, three
issues are involved: (1) whether the hormone will be 95 percent or only
80 percent pure, (2) whether the target date for completion will be three
or five years, and (3) whether B will lend two of its expert biochemists to
S to aid in the development. Firm B has estimated its values for various
combinations of issues, and firm S has estimated its costs. These amounts
are shown in the table.
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