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
-Under Scenario 18.1, suppose the body of water lies on an international boundary, and the fishermen speak a different language than the factory managers. The efficient outcome cannot be achieved if the cost of hiring translators for both parties:
A) is less than $4,000.
B) equals $5,000.
C) is greater than $6,000.
D) none of the above

Question

Quizplus · Accepted Answer

The efficient outcome (highest combined profit) is option B, with a total profit of $16,000 ($6,000 for the factory and $10,000 for the fishermen). If the cost of hiring translators is greater than $6,000, the additional cost would make negotiations too expensive to achieve this outcome, as the net benefit would be reduced below the next best alternative (option A with a combined profit of $12,000).

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