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"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 scum 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 scum in the lake. However, converting the plant would increase yearly costs by $100,000. Is 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 $150,000.
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) None of the above.

Microeconomics, Economics

  • Category:- Microeconomics
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