Suppose There Are Two Firms on a River and the Production

question 160

Multiple Choice

Suppose there are two firms on a river and the production processes of both require clean water. The upstream firm's process dirties the water, which it dumps back into the river. The downstream firm must clean the water before using it in its production process. If the two firms would merge

• A) the external costs of the merged firm would equal the external costs of the upstream firm, which would then be passed on to its customers.
• B) the total costs of production fall since the external costs disappear.
• C) the external costs of the upstream firm are private costs after the merger.
• D) the internal costs of the downstream firm become external costs of the merged firm.

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