Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $75,000.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.Suppose there is no law preventing the firm from polluting the river.Which of the following describes an efficient outcome in this case?
A) The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
B) The owner of the mill pays the farmer $87,500 in compensation for its pollution.
C) The farmer pays the owner of the mill $112,500 to stop polluting.
D) The farmer pays the owner of the mill $87,500 to stop polluting.

Question

Quizplus · Accepted Answer

The efficient outcome would be for the farmer to pay the owner of the mill $87,500 to stop polluting. This is because the cost of abatement is only $75,000, which is less than the difference in the farmer's earnings between clean and polluted water ($100,000). By paying the owner of the mill $87,500, the farmer can ensure that the water he uses is clean and still earn a net benefit of $12,500 ($100,000 - $87,500). This solution is efficient because it results in the lowest overall cost for society (i.e. $75,000 cost of abatement + $87,500 payment to the owner of the mill = $162,500) while still allowing both the mill and the farmer to benefit financially.

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