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 preclude the possibility of private bargaining between the chemical plant and the farm.Which liability rule will not result in an efficient outcome?

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 preclude the possibility of private bargaining between the chemical plant and the farm.Which liability rule will not result in an efficient outcome?

Quizplus · Accepted Answer

When the farm bears all of the costs of the crop damage, it will not result in an efficient outcome because the chemical plant will not have any incentive to reduce their pollution. The cost of the damaged crop is not internalized by the chemical plant, so they do not have any motivation to reduce their pollution levels. This can lead to continued crop damage and a loss of income for the farm.

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