Asked by Bennie Raymond on May 09, 2024
Verified
Refer to Scenario 18.1. What should the fishermen do if they know the factory will maximize profits and no negotiation is possible?
A) Install a treatment plant.
B) Do not install a treatment plant.
C) It makes no difference if the fishermen do or do not install a treatment plant.
D) Install a filter.
E) Exit the industry.
Treatment Plant
A facility where pollutants are removed from water, air, or waste to reduce environmental impact and protect public health.
Filter
A device or process that removes unwanted parts from a substance or signal.
Negotiate Costlessly
The theoretical scenario wherein parties can reach agreements without incurring any transaction or communication costs.
- Learn the foundational aspects of the Coase theorem and its application in brokering agreements regarding pollution costs and benefits.
Verified Answer
JN
Janette NicoleMay 12, 2024
Final Answer :
A
Explanation :
The fishermen should install a treatment plant. If the factory maximizes profits and no negotiation is possible, the factory will choose option C (no filter; treatment plant) which results in a profit of $10,000 for the factory and $4,000 for the fishermen. However, if the fishermen install a treatment plant, the factory will choose option D (filter; treatment plant) which results in a profit of $6,000 for both the factory and the fishermen. Therefore, the fishermen's best option is to install a treatment plant in order to ensure a higher profit for themselves.
Learning Objectives
- Learn the foundational aspects of the Coase theorem and its application in brokering agreements regarding pollution costs and benefits.