Scenario: A chemical factory is located upstream on a river. The factory dumps its liquid waste into the river. A microbrewery is located downstream on this river; it uses the river water in its production process and values the clean water. The chemical factory can filter its liquid waste before dumping it into the river, but it would be costly to the factory. The table below shows the profit to these two businesses under different circumstances.

-Refer to scenario above.Could this externality problem be resolved by private negotiations between the chemical factory and the microbrewery?
A) Yes, but only when the negotiations are relatively costless.
B) Yes, but the chemical factory should be forced to pay a fine for polluting the river.
C) No, because filtering the waste decreases the profit of the chemical factory.
D) No, because dumping the waste into the river is free for the chemical factory.

Question

Scenario: A chemical factory is located upstream on a river. The factory dumps its liquid waste into the river. A microbrewery is located downstream on this river; it uses the river water in its production process and values the clean water. The chemical factory can filter its liquid waste before dumping it into the river, but it would be costly to the factory. The table below shows the profit to these two businesses under different circumstances.
 
-Refer to scenario above.Could this externality problem be resolved by private negotiations between the chemical factory and the microbrewery?
A) Yes, but only when the negotiations are relatively costless. 
B) Yes, but the chemical factory should be forced to pay a fine for polluting the river. 
C) No, because filtering the waste decreases the profit of the chemical factory. 
D) No, because dumping the waste into the river is free for the chemical factory.

Quizplus · Accepted Answer

Private negotiations between the chemical factory and the microbrewery could potentially resolve this externality problem as long as the negotiations are relatively costless. The chemical factory could agree to filter the liquid waste before dumping it into the river in exchange for compensation from the microbrewery. This would benefit both businesses by increasing the profit for the microbrewery and reducing the cost of filtering for the chemical factory. However, if negotiations were too costly or if the chemical factory refused to filter their waste, it may not be possible to resolve the externality problem through private negotiations alone.

Scenario: a Chemical Factory Is Located Upstream on a River