Pollutants

A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month.

-Refer to Pollutants.Suppose transactions costs are zero.Also suppose the chemical plant is not liable for the farm's crop damages and can continue to pollute the stream.What will be the result of private bargaining between the farm and the chemical plant?

Question

Pollutants

A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month.

-Refer to Pollutants.Suppose transactions costs are zero.Also suppose the chemical plant is not liable for the farm's crop damages and can continue to pollute the stream.What will be the result of private bargaining between the farm and the chemical plant?

Quizplus · Accepted Answer

Given the scenario and assuming zero transaction costs, the Coase Theorem suggests that the parties will negotiate a solution that minimizes the total cost of mitigating the pollution. Since the filtering system ($300 per month) is less expensive than both the crop damage ($800 per month) and the new irrigation system ($600 per month), the chemical plant and the farm will likely agree on installing the filtering system as the most cost-effective solution.

Pollutants A Chemical Plant's Production Adds Pollutants to a Stream Which