Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.If _______,then abatement would be efficient. A) A 100,000 C) A

Question

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.If _______,then abatement would be efficient.
A) A < 300,000
B) A > 100,000
C) A < 100,000
D) A < 400,000

Quizplus · Accepted Answer

For abatement to be efficient, the cost of abatement should be less than the sum of damages kept by the paper mill ($1,000,000) and the farmer's loss from pollution ($100,000). 
So, abatement would be efficient if:  
A < ($1,000,000 + $100,000) = $1,100,000
A < $100,000, therefore option C) is the best choice.

Suppose a Paper Mill Earns $1,000,000 in Profits When It