Scenario: a Chemical Factory Is Located Upstream on a River

question 8

Multiple Choice

Scenario: A chemical factory is located upstream on a river. The factory dumps its liquid waste into the river. A microbrewery is located downstream on this river; it uses the river water in its production process and values the clean water. The chemical factory can filter its liquid waste before dumping it into the river, but it would be costly to the factory. The table below shows the profit to these two businesses under different circumstances.

-Refer to scenario above.Suppose the chemical factory has the right to dump its waste into the river.What would the Coase Theorem suggest as the resolution of this negative externality conflict between these two firms?

• A) The microbrewery pays $100 to the chemical factory to filter its waste before dumping it into the river.
• B) The chemical factory voluntarily filters its waste before dumping it into the river.
• C) The microbrewery pays $250 to the the chemical factory to filter its waste before dumping it into the river.
• D) The chemical factory pays $300 to the microbrewery to get permission to dump into the river.

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Definitions:

Faulting

The process by which rocks break and move along a fracture plane in the Earth's crust, often associated with seismic activity.

Earthquake

A sudden and violent shaking of the ground, sometimes causing great destruction, as a result of movements within Earth's crust or volcanic action.

Refracted

A process by which the direction of a wave or ray changes as it passes obliquely from one medium into another in which its speed is different.

Reflected

The process whereby light or other waves are bounced back from a surface without being absorbed.