Question

Suppose that a paper
mill earns $700,000 when it pollutes a river, and that it can abate
pollution at a cost of $140,000. The effects of pollution are
confined to a single farmer, who earns $530,000 if the water is
clean and $230,000 if it is polluted. Assume that bargaining is
frictionless and that the parties will split the gains from any
agreement equally.

a. What agreement will the mill and the farmer negotiate if the
mill has the right to pollute?

A. The farmer will pay the mill $220,000.

B. The farmer will pay the mill $140,000.

C. The mill will pay the farmer $220,000.

D. The mill will pay the farmer $140,000.

E. No agreement needs to be made.

Answer #1

**Ans - B)The farmer will pay the mill
$140,000**

**Explanation:**

The paper mill can abate pollution at cost of $140,000.

So, it will need at least $140,000 to stop polluting the river

If there is no pollution can increase the earning of farmer by $300,000 ( 530000-230000)

if the mill has the right to pollute then it would be beneficial for the farmer to give $140,000 to the mill to stop it from polluting the river as it will bring a gain of $160,000 ( 300000-140000) to the farmer.

So,

**Ans - B)The farmer will pay the mill
$140,000**

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 14 minutes ago

asked 15 minutes ago

asked 20 minutes ago

asked 33 minutes ago

asked 35 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 39 minutes ago

asked 39 minutes ago

asked 46 minutes ago