Consider a Paper Factory (PF), which uses input y to produce its product, pollutes the environment that harms an Apple Producer (AP). Since the PF has the legal right to pollute, the AP has to bribe the PF if it wants PF to reduce pollution. The benefit function of PF (before input costs) is B=20y−y^2, the price of input y Py=2, and the damage function of AP is D=y^2
. (a) How much will PF pollute in the absence of any bargaining (assuming that it has the property right)? What is the efficient solution? (7 pts) (b) Draw a diagram and show market equilibrium outcome and efficient solution. Calculate the Pigouvian tax required to achieve the efficient solution and show how this tax achieves the efficient solution in your diagram. (6pts) (c) Next, consider a bargaining solution. Calculate the amount AP has to bribe to PF so that PF will reduce its pollution to the efficient level (assuming a competitive bargaining). What is the minimum compensation PF requires to reduce pollution from the market to efficient level? (7 pts)