-A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the fish. The marginal social cost, private marginal cost, and marginal benefit from producing chemicals are in the figure above. Initially the lake is owned by no one. Keeping in mind the Coase theorem, if transactions costs are low then if the chemical factory owns the lake ________ tons of chemicals will be produced and if the fishing club owns the lake, ________ tons of chemicals will be produced.

Question

Quizplus · Accepted Answer

The Coase theorem states that if transaction costs are low, then the efficient outcome will be achieved regardless of who owns the resource. In this case, the efficient outcome is to produce 4 tons of chemicals, because this is the point where the marginal social cost and the marginal benefit are equal. If the chemical factory owns the lake, it will produce 4 tons of chemicals because this is the point where its marginal private cost and the marginal benefit are equal. If the fishing club owns the lake, it will also produce 4 tons of chemicals because this is the point where its marginal social cost and the marginal benefit are equal.

-A Chemical Factory and a Fishing Club Share a Lake