Assume Pollutex Inc.produces paper in its plant located on Lake Ontario,half a mile away from CleanAir Camping.Pollutex employs an obsolete production process,dumping pollutants in the lake.The camp has experienced a steady decline in the number of attendees since Pollutex moved nearby.In particular,the owners forecast that CleanAir Camping will generate a profit of only $50,000 a year in the future,which is $150,000 less than the one generated before Pollutex moved nearby.A cleaner production process is available,which would not require dumping the pollutants in the lake.However,converting the plant would increase yearly costs by $100,000.Is the current situation Pareto efficient?
A)Yes,since there is no alternative that would make CleanAir better off without hurting Pollutex,and vice versa.
B)No,as Pollutex could convert its plant and make CleanAir better off by $200,000.
C)No.In fact,CleanAir owners could pay Pollutex a sum between $100,000 and $150,000 a year to convert its plant and increase profits between $0 and $50,000.
D)No.In fact,Pollutex owners could pay CleanAir a sum between $0 and $150,000 to move to a different location.

Question

Quizplus · Accepted Answer

The current situation is not Pareto efficient because there is a potential for mutual benefit. CleanAir could compensate Pollutex for the conversion costs, improving the situation for both parties without making either worse off.