Question

1. The village of Smallville has a river running through it. The 100 residents in Smallville depends on the river for drinking water. A new factory is located upstream of the river and dumps toxins into the river. The factory makes a profit of X a year. As a result of the water pollution, each resident spends Z a year on water purification. If the factory adopts water-purifying technology, it will cost the factory an amount equal to C a year. Assume the toxins will disappear as soon as the factory installs the water-purifying technology. Answer the following questions:

   1. According to Coase Theorem, how can the residents in Smallville negotiate with the factory if there is no law prohibiting the factory from dumping toxins into the river? Consider the following cases: (1) X > C > 100Z, (2) X > 100Z > C

   2. How can the residents negotiate with the factory if the residents are entitled by the law to clean drinking water? Consider the following cases: (1) X > C > 100Z, (2) X > 100Z > C, (3) C > 100Z > X

Answer 1

Hi

The answer of the following question is given below as follows

Ans.A) Each resident spends Z on water purification, Like the cost of building the water, the purifier is higher than the villagers who clean it.

So the Residents will have to pay the factory to install water purification technology ,SoThis would be effective, as the villagers' small payment to build a purifier is less than to clean it themselves.

Ans.B)The factory pays each resident to install the water purification, As the factory unloads, waste and residents must clean up. This is the correct choice.So The factory adopts water purification technology,Now This would be more profitable in the long run.Factory shuts down The profit is less than everything else, which means there is no choice but to close.

I hope I have served the purpose well.

Thanks.