Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $120,000.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 owner of the mill is unable to pay the farmer enough to secure his permission to pollute the river.
B) The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
C) The owner of the mill pays the farmer $110,000 for his permission to pollute the river.
D) The farmer pays the owner of the mill $90,000 to stop polluting.

Question

Quizplus · Accepted Answer

An efficient outcome in this case would be for the paper mill to abate pollution because the cost of abatement is less than the value of pollution. The farmer values clean water at $100,000 more than polluted water while the cost of abatement is only $120,000. Therefore, the paper mill should abate pollution to maximize social welfare, and the farmer should not have to pay the paper mill to stop polluting. It is not efficient for the farmer to pay the paper mill to stop polluting because this would result in a $10,000 loss to society as a whole. Similarly, it is not efficient for the paper mill to pay the farmer for permission to pollute the river because this would result in a $10,000 loss to society as a whole. The most efficient outcome is for the paper mill to abate pollution and for the farmer to benefit from clean water without having to pay for it. Therefore, choice B is the correct answer.

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