Environmental economics: externalities and costless bargaining. Coase Theorem and a simple example of how costless bargaining leads to an efficient outcome.
Jack and May are the only residents of a small island. Jack operates a papermill, and has costs given by MPC = 10+2Q. Jack gets a price of $24 for each unit of paper he sells. May hates the pollution that the mill produces, and has damages given by MEC = Q + 2. (a) Assume that property rights to the environment are establishe