A factory benefits from discharging effluent, q, into a lake. The marginal benefit function is given by 60-2q. The pollution causes damages to two nearby communities. The marginal damages to Community A are 1q. The marginal damages to community B are 2q.
Now suppose a new technology allows the communities to measure the quantity of pollution from the factory. What is the quantity of abatement that would be observed if the two communities could not reach an informal agreement among themselves, but each community could undertake a transaction with the factory? Would there be a free rider problem, yes or no? If yes, which party would free ride?