Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars)for the three parties are listed below.
If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter?
A)No, because it makes $200 less in profit with the filter.
B)Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter.
C)No, because use of a filter would result in smaller total economic surplus.
D)Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Question

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars)for the three parties are listed below.  
 If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter?
A)No, because it makes $200 less in profit with the filter. 
B)Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter. 
C)No, because use of a filter would result in smaller total economic surplus. 
D)Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Quizplus · Accepted Answer

The increase in the fishermen's and bird watchers' benefits is $310  ̶  $75 = $235; they must pay Erie more than $200, so there is room for a mutually beneficial transaction.

Suppose Erie Textiles Can Dispose of Its Waste "For Free