How could you use the Case theorem to predict what would happen when smoke from a factory creates dirty air and slightly acid rain for all the residents in the area in a one-mile radius of the plant?

Question

Please provide the best answer for the statement.

Answer 1

Under the assumptions of the Case theorem, either the property owners would have the rights to clean air or the factory would have the property rights to pollute the air in that neighborhood. If the property owners had rights to clean air, the factory would want to see if it could buy the rights at a cost less than the cost of purifying its emissions. The residents in turn would have an incentive to determine how much the factory would be willing to pay them for their clean air rights. Negotiations between the two parties would lead to an “efficient” outcome: an optimal amount of pollution based upon the marginal costs and benefits of clean air.
If the factory initially owned pollution rights for the area, then the property owners would have to decide how much they would be willing to pay to get the factory to reduce or eliminate the pollution. The factory has an incentive to negotiate with the residents to find out whether those affected negatively by the pollution would be willing to pay the factory an amount greater than what it would cost the factory to clean up some or all the pollution. Once again the Case theorem would predict that the two parties will negotiate an economically efficient outcome.