Consider two identical parcels of land, each of whose surface value is $1,000 to a potential buyer. The owner of each parcel values the surface at $800, but one of the parcels has contamination that will cost $500 to clean up. The owners know whether their parcels are contaminated, but the buyer does not (that is, the parcels look identical to the buyer).
(a) Is it efficient for the buyer to acquire one of the parcels? Explain.
(b) What is the buyer's best offer for a parcel if sellers are fully responsible for cleanup costs? What is the buyer's best offer if the buyer is responsible?
(c) Show that the seller of the uncontaminated parcel will accept the buyer's best offer only if sellers are responsible, but the seller of the contaminated parcel will accept the buyer's best offer under either rule for cleanup costs.