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A factory produces widgets. It currently produces 10,000 widgets per day, which it can sell for a total profit of $25,000 per day. The factory's operation creates smoke that affects nearby homeowners, causing respiratory ailments and similar problems. At the current level of operation, the damage is $10,000 per day. The efficient level of operations is 8,000 widgets per day. At this level, the factory would generate profits of $20,000 per day, but the damage to nearby homeowners would be reduced to $2,500 per day. If the factory were shut down, it would generate zero profits, but the damage to nearby homeowners would also be reduced to zero.

Suppose that bargaining as envisioned by the Coase Theorem can take place, and that the homeowners initially hold the right to a pollution-free environment. What quantity of widgets (Q) will be produced per day? Which party will pay the other? What is the range of possible payments (i.e., the minimum and the maximum that would be paid)?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M941853

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