Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
-In the case in Scenario 18.1, the Coase theorem specifies that:
A) the result will be different if the fishermen are given the right to clean water than it will be if the factory is given the right to use the water as it sees fit, but the result will be inefficient in either case.
B) the efficient result will occur whether the fishermen are given the right to clean water or the factory is given the right to use the water as it sees fit.
C) economic efficiency requires that the fishermen be given the right to clean water.
D) economic efficiency requires that no one may contaminate the water.
E) economic efficiency requires that the fishermen be given the right to clean water and that the factory be given the right to use the water as it sees fit.

Question

Quizplus · Accepted Answer

The Coase theorem posits that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this scenario, whether the fishermen have the right to clean water or the factory has the right to pollute, they can negotiate to reach the most efficient outcome (maximizing total profit) without regard to who holds the initial rights.

Scenario 18.1: It Is the Factory's Choice Whether to Install a Filter