Scenario: a Chemical Factory Is Located Upstream on a River

question 115

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.Could this externality problem be resolved by private negotiations between the chemical factory and the microbrewery?

• A) Yes, but only when the negotiations are relatively costless.
• B) Yes, but the chemical factory should be forced to pay a fine for polluting the river.
• C) No, because filtering the waste decreases the profit of the chemical factory.
• D) No, because dumping the waste into the river is free for the chemical factory.

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