Suppose a rail freight route yields profits of $10,000 per trip, and as many as three trains per day can use the route.

2. Suppose a rail freight route yields profits of $10,000 per trip, and as many as three trains per day can use the route. However, smoke from the train imposes losses on several towns bordering the railroad according to the following schedule:

Trains per dayTotal losses to town 1Total losses to town 2Total losses to town 3

0 0 0 0

1 $1,000 $2,000 $4,000

2 $3,000 $7,000 $9,000

3 $5,000 $12,000 $15,000

The town bordering the railroad demand (and receive) an injection to stop the use of the railroad.

(a) If the rail company runs the maximum number of trains possible, us the injection economically efficient? (I.e., do the costs outweigh the benefit?)

(b) Does your answer change if the company only runs 2 trains per day?

(c) If bargaining is costless, is there potential for a deal whereby both the towns and railroad company can be made better off than they would be in the case of an injection? If so, describe a potential mutually beneficial deal.

(d) Using the single-owner principle, what is the optional number of trains?

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