The above figure shows a payoff matrix for two firms, A and B, ...

[hubes95]

The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. If the chemical firm owns the lake and the beach owner must pay the chemical firm $10 to produce only one ton of pollution, what is the outcome? If the beach owner owns the lake and the chemical firm must pay $10 per ton of pollution, what is the outcome? Compare this result to the case where nobody owns the lake.

[mjenn52]

If the chemical firm owns the lake, the right column does not change, the cells in the left column change from (15, 0) and (15, 25) to (25, -10) and (25, 15). Producing just 1 ton of pollution is the firm's dominant strategy. The beach will operate, and both enjoy joint profits of 40. If the beach owner owns the lake the cells change to the following: Upper left column becomes (5, 10) and (5, 35). The right column becomes (0, 20) and (0, 30). Producing 1 ton of pollution is a dominant strategy for the firm. The beach operates and they enjoy joint profits of 40. Without property rights, the dominant strategy for the chemical firm is to produce 2 tons of pollution and the beach to operate, for a joint profit of only 30.