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.Suppose the chemical factory has the right to dump its waste into the river.What would the Coase Theorem suggest as the resolution of this negative externality conflict between these two firms?
A) The microbrewery pays $100 to the chemical factory to filter its waste before dumping it into the river.
B) The chemical factory voluntarily filters its waste before dumping it into the river.
C) The microbrewery pays $250 to the the chemical factory to filter its waste before dumping it into the river.
D) The chemical factory pays $300 to the microbrewery to get permission to dump into the river.

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.Suppose the chemical factory has the right to dump its waste into the river.What would the Coase Theorem suggest as the resolution of this negative externality conflict between these two firms?
A) The microbrewery pays $100 to the chemical factory to filter its waste before dumping it into the river. 
B) The chemical factory voluntarily filters its waste before dumping it into the river. 
C) The microbrewery pays $250 to the the chemical factory to filter its waste before dumping it into the river. 
D) The chemical factory pays $300 to the microbrewery to get permission to dump into the river.

Quizplus · Accepted Answer

The Coase Theorem suggests that the party with the lower cost of abatement will take the necessary steps to reduce the negative externality. In this case, the chemical factory has the lower cost of abatement, so it would be more efficient for the chemical factory to filter its waste before dumping it into the river.

Scenario: a Chemical Factory Is Located Upstream on a River